20-F 1 d125599d20f.htm FORM 20-F Form 20-F
falseFY0001762417trueEvery ten ADSs represent one ordinary share.The Group opened accounts with external online payment service providers to collect funding from users.In January 2018, Wuhan Douyu repurchased Series C-2 Preferred Equity from its investor at fair value for a cash consideration of RMB39,995,000. The difference of RMB6,661,667 between the consideration paid and the carrying amount of Series C-2 Preferred Equity at the date of repurchase was recorded in additional paid-in capital.In May 2018, the Company repurchased 125,000 ordinary shares from one of the investors and issued the corresponding number of Series B-4 Preferred Shares to the same investor with no cash consideration. The difference between the fair value of ordinary shares repurchased and that of the Series B-4 Preferred Shares issued is immaterial.On May 29, 2018, the Company issued 7,828,728 shares of Series E redeemable convertible preferred shares (“Series E Preferred Shares”) at a per-share purchase price of US$80.57 for cash consideration of RMB4,026,518,012.In March 2020, the Group purchased 15% equity of Chengdu Shuangsi with cash consideration of RMB4,500,000. The difference between the fair value of the consideration paid and the carrying amount of the noncontrolling interest acquired was recognized in additional paid-in capital.In April, June and November, 2020, the Group and noncontrolling interest shareholder purchased the newly issued common shares of DouYu Japan with consideration of JPY4,189,200,000 (equivalent of RMB272,248,433 ) and JPY1,610,800,000 (equivalent of RMB105,129,847 ), respectively. As a result of these transactions, the noncontrolling interest shareholder’s ownership interest increased from 14.9% to 28.9% while the Group retains its controlling financial interest in DouYu Japan. 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM
20-F
 
 
(Mark One)
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021.
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
 
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
                    
For the transition period from
                    
to
                    
Commission file number:
001-38967
 
 
DouYu International Holdings Limited
(Exact name of Registrant as specified in its charter)
 
 
N/A
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
20/F, Building A, New Development International Center,
No. 473 Guanshan Avenue,
Hongshan District, Wuhan, Hubei Province, 430073,
People’s Republic of China
(Address of principal executive offices)
Shaojie Chen
Chief Executive Officer
Tel: +86 27 8775 0710
E-mail:
ir@douyu.tv
20/F, Building A, New Development International Center,
No. 473 Guanshan Avenue,
Hongshan District, Wuhan, Hubei Province, 430073,
People’s Republic of China
(Name, Telephone,
E-mail
and/or Facsimile number and Address of Company Contact Person)
 
 
Securities registered or to be registered pursuant to Section 12(b) of the Act.
 
Title of each class
 
Trading
Symbol
 
Name of each exchange
on which registered
American depositary shares, every 10 American depositary shares represent one ordinary share, par value US$0.0001 per share
 
DOYU
 
The Nasdaq Global Select Market
Ordinary shares, par value US$0.0001 per share*
 
N/A
 
The Nasdaq Global Select Market
 
*
Not for trading, but only in connection with the listing of the American depositary shares on the Nasdaq Global Select Market.
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
(Title of Class)
 
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
32,327,391 ordinary shares, par value $0.0001 per share as of December 31, 2021.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ☐    No  ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
 
Large accelerated filer  
 
Accel
e
rated filer
 
 
 
 
   Non-accelerated filer  
   
 
 
 
 
 
 
     
     
 
 
 
 
 
 
   Emerging growth company  
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards † provided pursuant to Section 13(a) of the Exchange Act.  ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the
eff ectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing
:
 
U.S. GAAP  ☒   International Financial Reporting Standards as issued        Other  ☐
   
by the International Accounting Standards Board
  
  
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    ☐  Item 17  ☐    Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).    Yes  ☐    No  
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  ☐    No  ☐
 
 
 

TABLE OF CONTENTS
 
 
 
 
  
Page
 
  
 
ii
 
  
 
iv
 
  
 
1
 
ITEM 1.
 
  
 
1
 
ITEM 2.
 
  
 
1
 
ITEM 3.
 
  
 
1
 
ITEM 4.
 
  
 
59
 
ITEM 4A.
 
  
 
97
 
ITEM 5.
 
  
 
97
 
ITEM 6.
 
  
 
115
 
ITEM 7.
 
  
 
124
 
ITEM 8.
 
  
 
125
 
ITEM 9.
 
  
 
127
 
ITEM 10.
 
  
 
127
 
ITEM 11.
 
  
 
136
 
ITEM 12.
 
  
 
136
 
  
 
138
 
ITEM 13.
 
  
 
138
 
ITEM 14.
 
  
 
138
 
ITEM 15.
 
  
 
139
 
ITEM 16.A.
 
  
 
140
 
ITEM 16.B.
 
  
 
140
 
ITEM 16.C.
 
  
 
140
 
ITEM 16.D.
 
  
 
140
 
ITEM 16.E.
 
  
 
141
 
ITEM 16.F.
 
  
 
141
 
ITEM 16.G.
 
  
 
141
 
ITEM 16.H.
 
  
 
142
 
  
 
142
 
ITEM 17.
 
  
 
142
 
ITEM 18.
 
  
 
142
 
ITEM 19.
 
  
 
142
 
 
i

INTRODUCTION
Except where the context otherwise indicates and for the purpose of this annual report only:
 
   
“active users” refers to users who visited our platform through a PC or mobile app at least once in a given period; the number of active PC users is measured as the number of independent cookies generated by our website when users visited our platform through a PC in a given period, and the number of active mobile users is measured as the number of mobile devices that launched our mobile apps in a given period. The number of active users is calculated by treating each distinguishable independent cookie or mobile device as a separate user even though some individuals may access our platform with more than one independent cookie or using more than one mobile device and multiple individuals may access our services with the same independent cookie or using the same mobile device;
 
   
“ADSs” refers to the American Depositary Shares, every 10 ADSs represent one ordinary share, par value US$0.0001 per share;
 
   
“annual paying users” refer to the total paying users for a given year after removing double-counting because of multiple payments;
 
   
“ARPPU” refers to average livestreaming revenue per paying user in a given period;
 
   
“average mobile MAUs” for a given period of time is calculated by dividing (i) the sum of active mobile users for each month of such period by (ii) the number of months in such period;
 
   
“average next-month active user retention rate” for any period is calculated by dividing (i) the sum of next-month active user retention rate for each month of such period by (ii) the total number of months in such period;
 
   
“average total eSports MAU” refers to the average total eSports MAUs during a given period of time calculated by dividing (i) the sum of active users, including active PC users and active mobile users who accessed game-themed channels on our platform in each month of such period by (ii) the number of months in such period;
 
   
“Beijing Fengye” refers to Beijing Fengye Equity Investment Center (Limited Partnership);
 
   
“Beijing Phoenix” refers to Beijing Phoenix Rich Investment Management Center (Limited Partnership);
 
   
“CDN” refers to content delivery network;
 
   
“China” or “PRC” refer to the People’s Republic of China, excluding, for the purposes of this annual report only, Taiwan, Hong Kong and Macau;
 
   
“Douyu Education” refers to Wuhan Douyu Education Consulting Co., Ltd.;
 
   
“Douyu Yule” refers to Wuhan Douyu Culture Network Technology Co., Ltd.;
 
   
“Gogo Glocal” refers to Gogo Glocal Holding Limited, an exempted company incorporated under the laws of the Cayman Islands;
 
   
“Guangzhou Douyu” refers to Guangzhou Douyu Internet Technology Co., Ltd.;
 
   
“Huya” refers to HUYA Inc.;
 
   
“Linzhi Lichuang” refers to Linzhi Lichuang Information Technology Co., Ltd., an entity controlled by Tencent Holdings Limited;
 
   
“MAUs” refers to the number of active users, including active PC users and active mobile users in a given month;
 
   
“Merger Agreement” refers to the Agreement and Plan of Merger dated October 12, 2020 entered into by DouYu, Huya, Tiger Company Ltd. and Nectarine;
 
   
“Nectarine” refers to Nectarine Investment Limited, a wholly-owned subsidiary of Tencent Holdings Limited;
 
   
“next-month active user retention rate” is calculated by dividing (i) the sum of active users who visited our platform through a PC or mobile app at least once in the next month after a given month by (ii) the sum of all active users in that given month;
 
   
“ordinary shares” refers to our ordinary shares of par value US$0.0001 per share;
 
   
“P2P” refers to
peer-to-peer;
 
   
“paying user” for any period in the context of our operating data refers to a registered user that has purchased virtual gifts on our platform at least once during the relevant period. A paying user is not necessarily a unique user, however, as a unique user may set up multiple paying user accounts on our platform, and consequently, the number of paying users we present in this annual report may not equal to the number of unique individuals who made purchases on our platform for any given period of time;
 
ii

   
“Penguin” or “Penguin Business” refers to the game livestreaming business operated by the Tencent group under the “Penguin
e-Sports”
brand;
 
   
“quarterly average paying users” refers to the average paying users for each quarter during a given period of time calculated by dividing (i) the sum of paying users for each quarter of such period by (ii) the number of quarters in such period;
 
   
“Reassignment” refers to the proposed reassignment of the Penguin Business by Nectarine to DouYu, whereby upon its completion, we will beneficially own and operate the Penguin Business;
 
   
“Reassignment Agreement” refers to the reassignment agreement, dated October 12, 2020, by and between Nectarine and us;
 
   
“registered streamer” refers to a user that has been registered on our platform as a streamer;
 
   
“registered user” refers to a user that has registered and logged onto our platform at least once since registration. We calculate registered users as the cumulative number of user accounts at the end of the relevant period that have logged onto our platform at least once after registration. Each individual user may have more than one registered user account, and consequently, the number of registered users we present in this annual report may not equal to the number of unique individuals who are our registered users;
 
   
“retention rate” refers to the percentage of users who make at least one repeat use after a certain duration;
 
   
“RMB” or “Renminbi” refers to the legal currency of the People’s Republic of China;
 
   
“RSU” refers to restricted share unit;
 
   
“Tencent” refers to Tencent Holdings Limited;
 
   
“US$,” “dollars” or “U.S. dollars” refers to the legal currency of the United States;
 
   
“We,” “Us,” “Our company,” “the Group,” “Our,” or “Douyu” refers to DouYu International Holdings Limited, a Cayman Islands exempted company and its subsidiaries, and, in the context of describing our consolidated financial information, business operations and operating data, the variable interest entities (“VIEs”) and their subsidiaries. As described elsewhere in this annual report, we do not own the VIEs, and the results of the VIEs’ operations only accrue to us through contractual arrangements between the VIEs, and the VIEs’ nominee shareholders, and certain of our subsidiaries. Accordingly, in appropriate contexts we will describe the VIEs’ activities separately from those of our direct and indirect owned subsidiaries and our use of the terms “we,” “us,” and “our” may not include the VIEs in those contexts;
 
   
“Wuhan Douyu” refers to Wuhan Douyu Internet Technology Co., Ltd.;
 
   
“Wuhan Ouyue” refers to Wuhan Ouyue Online TV Co., Ltd.;
 
   
“Wuhan Yuwan” refers to Wuhan Yuwan Culture Media Co., Ltd.;
 
   
“Yu Leyou” refers to Wuhan Yu Leyou Internet Technology Co., Ltd.;
 
   
“Yuxing Tianxia” refers to Wuhan Yuxing Tianxia Culture Media Co., Ltd.;
 
   
“Yuyin Raoliang” refers to Wuhan Yuyin Raoliang Culture Media Co., Ltd.; and
 
   
“Zhejiang Ouyue” refers to Zhejiang Ouyue Online TV Co., Ltd., which was subsequently renamed Wuhan Ouyue.
Unless the context otherwise requires, the operating data presented for our company in this annual report excludes Gogo Glocal, an exempted company incorporated under the laws of the Cayman Islands, or any other platform we incorporated to conduct our business overseas. We acquired a controlling stake of Gogo Glocal in October 2018 and all of its shares in February 2020.
We have made rounding adjustments to some of the figures included in this annual report. Accordingly, numerical figures shown as totals or percentages may not be an arithmetic calculation of the figures that preceded them.
Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this annual report are made at RMB6.3726 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on December 30, 2021. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all.
 
iii

FORWARD-LOOKING INFORMATION
This annual report contains statements that constitute forward-looking statements. Many of the forward-looking statements contained in this annual report can be identified by the use of forward-looking words such as “anticipate,” “believe,” “could,” “expect,” “should,” “plan,” “intend,” “estimate” and “potential,” among others.
Forward-looking statements appear in a number of places in this annual report and include, but are not limited to, statements regarding our intent, belief or current expectations. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. Such statements are subject to risks and uncertainties, and actual results may differ materially from those expressed or implied in the forward-looking statements due to various factors, including, but not limited to, those identified under the section entitled “Item 3. Key Information—3.D. Risk Factors” in this annual report. These risks and uncertainties include factors relating to:
 
   
our goals and growth strategies;
 
   
our future business development, results of operations and financial condition;
 
   
relevant government policies and regulations relating to our business and industry;
 
   
our expectation regarding the use of proceeds from our initial public offering in July 2019;
 
   
general economic and business condition in China;
 
   
status of the
COVID-19
pandemic;
 
   
assumptions underlying or related to any of the foregoing;
 
   
other factors that may affect our financial condition, liquidity and results of operations; and
 
   
other risk factors discussed under “Item 3. Key Information—3.D. Risk Factors.”
Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them in light of new information or future developments or to release publicly any revisions to these statements in order to reflect later events or circumstances or to reflect the occurrence of unanticipated events.
 
iv

PART I
 
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
 
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
 
ITEM 3.
KEY INFORMATION
Our Contractual Arrangements and Corporate Structure
We are a Cayman Islands holding company instead of an operating company in China. We conduct our operations in China through our PRC subsidiaries and consolidated variable interest entities (“the VIEs”). Currently we conduct substantially all of our business operations in the PRC through Douyu Yule, our subsidiary incorporated in the PRC, and the VIEs. Douyu Yule controls Wuhan Ouyue and Wuhan Douyu, and the VIEs in the PRC, through a series of contractual arrangements. We conduct a significant portion of our businesses in China through Wuhan Ouyue and Wuhan Douyu. It is the VIEs that hold our key operating licenses, provide services to our customers, and enter into contracts with our suppliers. In 2019, 2020 and 2021, the amount of revenues generated by the VIEs accounted for 99%, 91% and 98%, respectively, of our total net revenues. As of December 31, 2020 and 2021, total assets of the VIEs, excluding amounts due from other companies in the Group, equaled 27% and 27% of our consolidated total assets as of the same dates, respectively. As used in this annual report, “we,” “us,” “our company,” “the Group,” “our,” or “Douyu” refers to DouYu International Holdings Limited and its subsidiaries, and, in the context of describing our consolidated financial information, business operations and operating data, the consolidated VIEs. “Douyu Yule” refers to Wuhan Douyu Culture Network Technology Co., Ltd., “Wuhan Ouyue” refers to Wuhan Ouyue Online TV Co., Ltd., and “Wuhan Douyu” refers to Wuhan Douyu Internet Technology Co., Ltd. We refer to Wuhan Douyu Education Consulting Co., Ltd., Wuhan Yuwan Culture Media Co., Ltd., Wuhan Yuxing Tianxia Culture Media Co., Ltd., Wuhan Yuyin Raoliang Culture Media Co., Ltd., Wuhan Yu Leyou Internet Technology Co., Ltd., and Wuhan Yule as the PRC subsidiaries in the context of describing of their activities. We refer to Wuhan Ouyue and Wuhan Douyu as the VIEs in the context of describing their activities and contractual arrangements with us. The VIEs primarily conduct operations in China, and the VIEs are consolidated for accounting purposes but are not entities in which we own equity, and our Company does not conduct operations by itself. Investors in our ADSs are purchasing equity securities of a Cayman Islands holding company rather than equity securities issued by our subsidiaries and the VIEs. Investors who are
non-PRC
residents may never directly hold equity interests in the VIEs under current PRC laws and regulations.
We and our direct and indirect subsidiaries do not, and it is virtually impossible us to, have any equity interests in the VIEs in practice because current PRC laws and regulations restrict foreign investment in companies that engage in value-added telecommunication services. As a result, we depend on certain contractual arrangements with the VIEs to operate a significant portion of our business. These contractual arrangements entered into with the VIEs allow us to (i) exercise effective control over the VIEs, (ii) receive substantially all of the economic benefits of the VIEs, and (iii) have an exclusive option to purchase all or part of the equity interests in the VIEs when and to the extent permitted by PRC law. These contractual arrangements include the operating agreement, equity pledge agreement, exclusive purchase option agreement, shareholder voting right trust agreement, loan agreement and cooperation agreement, as the case may be. As a result of these contractual arrangements, we exert effective control over, and are considered the primary beneficiary of, the VIEs and consolidate their operating results in our financial statements under U.S. GAAP. The VIEs are owned by certain nominee shareholders, and not by us. All of these nominee shareholders are also beneficial owners of the Company. For more details of these contractual arrangements, see “Item 4. Information on the Company—4.C. Organizational Structure—Contractual Arrangements with the VIEs and the VIEs’ Respective Shareholders.”
However, the contractual arrangements may not be as effective as direct ownership in providing us with control over the VIEs and we may incur substantial costs to enforce the terms of the arrangements. If the VIEs or the nominee shareholders fail to perform their respective obligations under the contractual arrangements, we could be limited in our ability to enforce the contractual arrangements that give us effective control over the VIEs. Furthermore, if we are unable to maintain effective control, we would not be able to continue to consolidate the financial results of these entities in our financial statements. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—Any failure by the VIEs or their shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure— We rely on contractual arrangements with the VIEs and their shareholders for our operations in China, which may not be as effective in providing operational control as direct ownership.”
Our corporate structure involves unique risks to investors in the ADSs. Our contractual arrangements with the VIEs have not been tested in court. If the PRC government deems that our contractual arrangements with the VIEs do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to material penalties or be forced to relinquish our interests in those operations or otherwise significantly change our corporate structure. We and our investors face significant uncertainty about potential future actions by the PRC government that could affect the legality and enforceability of the contractual arrangements with the VIEs and, consequently, significantly affect our ability to consolidate the financial results of the VIEs and the financial performance of our company as a whole. Our ADSs may decline in value or become worthless if we are unable to effectively enforce our contractual control rights over the assets and operations of the VIEs that conduct a significant portion of our business in China. See “Item 3. Key Information—3.D. Risk Factor—Risks Related to Our Corporate Structure” for a detailed discussion.
 
1

We face various legal and operational risks and uncertainties as a company based in and primarily operating in China. The PRC government has significant authority to exert influence on the ability of a China-based company, like us, to conduct its business, accept foreign investments or be listed on a U.S. stock exchange. For example, we face risks associated with regulatory approvals of offshore offerings, anti-monopoly regulatory actions, cybersecurity and data privacy, as well as the lack of inspection from the U.S. Public Company Accounting Oversight Board, or PCAOB, on our auditors. The PRC government may also intervene with or influence our operations as the government deems appropriate to further regulatory, political and societal goals. The PRC government has recently published new policies that have significantly affected our industry and we cannot rule out the possibility that it will, in the future, further release regulations or policies regarding our industry that could adversely affect our business, financial condition and results of operations. Any such action, once taken by the PRC government, could cause the value of such securities to significantly decline or in extreme cases, become worthless.
You should carefully consider all of the information in this annual report before making an investment in the ADSs. Below, please find a summary of the principal risks and uncertainties we face organized under relevant headings. In particular, as we are a China-based company incorporated in the Cayman Islands, you should pay special attention to subsections headed “Item 3. Key Information—3.D. Risk Factors—Risks Related to Doing Business in China” and “Item 3. Key Information—3.D. Risk Factors—Risks Related to Our Corporate Structure.”
Recent Regulatory Development on Cybersecurity in the PRC
On June 10, 2021, the Standing Committee of the National People’s Congress of China promulgated the Data Security Law, which took effect on September 1, 2021. The Data Security Law introduces a data classification and hierarchical protection system based on the importance of data in economic and social development, and the degree of harm it may cause to national security, public interests, or legitimate rights and interests of individuals or organizations if such data are tampered with, destroyed, leaked, illegally acquired or illegally used. The appropriate level of protection measures is required to be taken for each respective category of data. The Data Security Law also requires data processing operators to establish a sound data security management system throughout the whole process, organize data security education and training, and take corresponding technical measures and other necessary measures to ensure data security.
On December 28, 2021, the Cyberspace Administration of China, or the CAC, the National Development and Reform Commission, or the NDRC, the Ministry of Industry and Information Technology, or the MIIT and several other PRC governmental authorities jointly issued the Cybersecurity Review Measures, which became effective on February 15, 2022. Pursuant to Cybersecurity Review Measures, critical information infrastructure operators that procure inertent products and servies and network platform operators engaging in data processing activities are subject to cybersecurity review under the Cybersecurity Review Measures if their activities affect or may affect national security. The relevant competent governmental authorities may initiate the cybersecurity review against the relevant operators if the authorities believe that the network product or service or data processing activities of such operators affect or may affect national security. In addition, network platform operators who possess personal information of more than one million users, and intend to be listed on a foreign stock exchange, must be subject to the cybersecurity review.
On November 14, 2021, the CAC published the Draft Measures for Internet Data Security, which provide that data processors conducting certain activities must apply for cybersecurity review, including, among others, merger, reorganization or separation of Internet platform operators that have acquired a large number of data resources related to national security, economic development or public interests that affects or may affect national security and the listing abroad of data processors processing over one million users’ personal information. The Draft Measures for Internet Data Security also require data processors processing over one million users’ personal information to comply with the regulations on important data processors, including, among others, appointing a person in charge of data security and establishing a data security management organization, filing with the competent authority within 15 working days after identifying its important data, formulating data security training plans, and organizing data security education and training for all staff every year, and that the education and training time of data-security-related technical and management personnel shall not be less than 20 hours per year. The Draft Measures for Internet Data Security also provides that data processors processing important data or going public overseas shall conduct an annual data security assessment by themselves or entrust a data security service institution to do so, and submit the data security assessment report of the previous year to the local branch of CAC before January 31 of each year. As advised by our PRC legal counsel, the Draft Measures for Internet Data Security have not been adopted and it remains unclear whether the formal version adopted in the future will have any further material changes, it is uncertain how the measures will be enacted, interpreted or implemented and how they will affect us. We cannot predict the impact of the draft measures, if any, at this stage, and we will closely monitor and assess any development in the rule-making process. If a final version of the Draft Measures for Internet Data Security is adopted, we may be subject to review when conducting data processing activities and annual data security assessment, and may face challenges in addressing its requirements and make necessary changes to our internal policies and practices in data processing. In addition, if the enacted version of the Draft Measures for Internet Data Security mandates clearance of cybersecurity review and other specific actions to be completed by China-based companies, such as us, that have been listed on overseas stock exchange, we face uncertainties as to whether we could obtain such clearance in a timely manner, or at all. During such review, we may be required to suspend providing any existing or new services to our customers and/or experience other disruptions of our operations, and such review could also result in negative publicity with respect to our company and diversion of our managerial and financial resources.
 
2

As of the date of this annual report, we have not been involved in any investigations or become subject to a cybersecurity review initiated by the CAC based on the Cybersecurity Review Measures, and we have not received any inquiry, notice, warning or sanctions in such respect or any regulatory objections to our listing status from the CAC.
Potential Approval or Filing of CSRC of other PRC Government Authorities Required for the Listing of our ADSs
On July 6, 2021, certain PRC regulatory authorities issued Opinions on Strictly Cracking Down on Illegal Securities Activities in accordance with the Law. These opinions call for strengthened regulation over illegal securities activities and supervision on overseas listings by China-based companies and propose to take effective measures, such as promoting the development of relevant regulatory systems to deal with the risks and incidents faced by China-based overseas-listed companies.
On December 24, 2021, the CSRC published the Administrative Provisions and the Draft Measures for public comments. Pursuant to these drafts, PRC domestic companies that directly or indirectly offer or list their securities in an overseas market, including a PRC company limited by shares and an offshore company whose main business operations are in China and intends to offer shares or be listed in an overseas market based on its onshore equities, assets, incomes or other similar interests, are required to file with the CSRC within three business days after submitting their listing application documents to the regulator in the place of intended listing. The Draft Measures also provide that a China-based company that has been listed in an overseas market is also required to file with the CSRC within three business days for its follow-on offering of securities in the overseas market after the completion of the issuance. However, there is no timetable as to when these drafts will be enacted.
As of the date of this annual report, the Administrative Provisions and the Draft Measures have not been adopted. The interpretation and implementation of these opinions and new rules remain unclear at this stage. We cannot assure you that we will not be required to obtain the approval of or file with the CSRC or other regulatory authorities to maintain the listing status of our ADSs on Nasdaq or to conduct offerings of securities in the future. We have been closely monitoring regulatory developments in China regarding any necessary approvals from or filing with the CSRC, the CAC, or other PRC regulatory authorities required for overseas listings.
As of the date of this annual report, we have not received any inquiry, notice, warning, sanctions or regulatory objection from the CSRC.
Material Licenses and Permits
Our PRC subsidiaries and the VIEs have obtained all material licenses and approvals required for our operations in China. For risks relating to licenses and approvals required for our operations in China, see “Item 3. Key Information—3.D. Risk Factors—Risks Related to Our Business and Industry.”
Transfer of Funds and Other Assets
DouYu International Holdings Limited, our Cayman Islands holding company, transfers cash to our wholly-owned Hong Kong subsidiary (through intermediate holding companies in the British Virgin Islands), by making capital contributions or providing loans, and our Hong Kong subsidiary transfers cash to our PRC subsidiaries by making capital contributions or providing loans to them.
Because DouYu International Holdings Limited and its subsidiaries control the VIEs through contractual arrangements, they are not able to make direct capital contribution to the VIEs and their subsidiaries. However, under relevant PRC laws and regulations, we are permitted to remit funds to the VIEs through loans rather than capital contributions. In 2019, 2020 and 2021, we did not make any loans to the VIEs. The VIEs fund their operations primarily using cash generated from operating and financing activities.
 
3

As of December 31, 2021, DouYu International Holdings Limited had made cumulative capital contributions of US$250.0 million to our PRC subsidiaries through our intermediate holding company, and those contributions were accounted as long-term investments of DouYu International Holdings Limited. These funds have been used by our PRC subsidiaries for their operations. As of December 31, 2020 and 2021, the loan balance owed under the VIE agreements was US$54.5 million and US$48.0 million, respectively. In 2019, 2020 and 2021, the VIEs transferred RMB5,062.2 million, RMB866.3 million and RMB937.9 million (US$147.2 million), respectively, to our PRC subsidiaries as payment or prepayment of service fees.
The VIEs may transfer cash to Douyu Yule by paying service fees according to the respective exclusive business cooperation agreements. Pursuant to these agreements between each of the VIEs and Douyu Yule, each of the VIEs agrees to pay Douyu Yule for services related to business support, technical and consulting services, including technical services, network support, business consultation, intellectual property licensing, equipment leasing, market consultancy, system integration, product research and development and system maintenance at an amount equal to all of the net profit of each of the VIEs, subject to adjustment at Douyu Yule’s sole discretion. For details of the contractual arrangements with the VIE, see “Item 4. Information on the Company—4.C. Organizational Structure—Contractual Arrangements with The VIEs and The VIEs’ Respective Shareholders.”
As of December 31, 2020 and 2021, the outstanding balance of service fees owed by the VIEs to our PRC subsidiaries were RMB2,493.8 million and RMB3,278.2 million (US$514.4 million), respectively. There were no other assets transferred between VIEs and
non-VIEs
in 2019, 2020 and 2021.
 
4

Condensed Consolidating Schedule
The following tables set forth the summary condensed consolidated balance sheets data as of December 31, 2020 and 2021 of (i) our Company and our subsidiaries and (ii) the VIEs and VIEs’ subsidiaries, and the summary of the condensed consolidated statements of operations and cash flows for the years ended December 31, 2019, 2020 and 2021. Our consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States. The historical results of us and the VIEs and VIEs’ subsidiaries are not necessarily indicative of results expected for future periods. You should read this information together with our consolidated financial statements and the related notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report.
 
    
For the Year Ended December 31, 2019
 
    
Our
Company
   
VIEs and
VIEs’
subsidiaries
   
Our
subsidiaries
   
Eliminating
adjustments between
(i)our Company and
our subsidiaries and
(ii)the VIEs and
VIEs’ subsidiaries
   
Consolidated
 
  
                              
    
(RMB in thousands)
 
Net revenues
(1)
     —         7,207,666       4,794,355       (4,718,791     7,283,230  
Total operating cost and expenses
(1)
     (34,956     (6,246,296     (5,852,439     4,718,791       (7,414,900
(Loss) income from operations
  
 
(34,956
 
 
961,370
 
 
 
(1,058,084
    —      
 
(131,670
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total other income (expenses)
     148,245       20,786       (771     —         168,260  
Income(loss) from equity in affiliates
     —         2,878       (6,120     —         (3,242
Loss from equity in subsidiaries and the VIEs and VIEs’ subsidiaries
(2)
     (73,536     —         —         73,536       —    
Net income (loss)
  
 
39,753
 
 
 
985,034
 
 
 
(1,064,975
 
 
73,536
 
 
 
33,348
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
    
For the Year Ended December 31, 2020
 
    
Our
Company
   
VIEs and
VIEs’
subsidiaries
   
Our
subsidiaries
   
Eliminating
adjustments between
(i)our Company and
our subsidiaries and
(ii)the VIEs and
VIEs’ subsidiaries
   
Consolidated
 
  
                              
    
(RMB in thousands)
 
Net revenues
(1)
     —         8,697,485       2,305,426       (1,401,037     9,601,874  
Total operating cost and expenses
(1)
     (54,597     (8,234,402     (2,451,850     1,401,037       (9,339,812
(Loss) income from operations
  
 
(54,597
 
 
463,083
 
 
 
(146,424
    —      
 
262,062
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total other income (expenses)
     116,757       (31,635     56,245       —         141,367  
Income(loss) from equity in affiliates
     —         1,283       23       —         1,306  
Income from equity in subsidiaries and the VIEs and VIEs’ subsidiaries
(2)
     423,339       —         —         (423,339     —    
Net income (loss)
  
 
485,499
 
 
 
432,731
 
 
 
(90,156
 
 
(423,339
 
 
404,735
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
5

    
For the Year Ended December 31, 2021
 
    
Our
Company
   
VIEs and
VIEs’
subsidiaries
   
Our
subsidiaries
   
Eliminating
adjustments between
(i)our Company and
our subsidiaries and
(ii)the VIEs and
VIEs’ subsidiaries
   
Consolidated
 
  
                              
    
(RMB in thousands)
 
Net revenues
(1)
     —         8,965,084       1,824,996       (1,624,749     9,165,331  
Total operating cost and expenses
(1)
     (110,279     (8,623,534     (2,704,928     1,624,749       (9,813,992
(Loss) income from operations
  
 
(110,279
 
 
341,550
 
 
 
(879,932
 
 
—  
 
 
 
(648,661
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total other income (expenses)
     33,568       32,066       (22,094     —         43,540  
Income(loss) from equity in affiliates
     —         14,503       (29,631     —         (15,128
Loss from equity in subsidiaries and the VIEs and VIEs’ subsidiaries
(2)
     (505,172     —         —         505,172       —    
Net income (loss)
  
 
(581,883
 
 
388,119
 
 
 
(931,657
 
 
505,172
 
 
 
(620,249
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
Notes:
 
(1)
The eliminations are mainly related to the service fees charged between our subsidiaries and VIEs.
(2)
The eliminations are mainly related to the investment loss picked up from subsidiaries and VIEs.
 
    
As of December 31, 2020
 
    
Our
Company
    
VIEs and
VIEs’
subsidiaries
    
Our
subsidiaries
    
Eliminating
adjustments between
(i)our Company and
our subsidiaries and
(ii)the VIEs and
VIEs’ subsidiaries
   
Consolidated
 
  
                                 
    
(RMB in thousands)
 
Assets
        
Cash and cash equivalents
     4,449,400        577,711        252,791        —         5,279,902  
Restricted cash
     —          11,243        632        —         11,875  
Short-term bank deposits
     1,370,229        860,000        —          —         2,230,229  
Accounts receivable, net
     —          187,884        11,860        —         199,744  
Prepayments
     890        63,120        2,247        —         66,257  
Other current assets
     24,267        157,178        55,259        —         236,704  
Investments in subsidiaries and the VIEs and VIEs’ subsidiaries
(1)
     1,118,657        8,000        —          (1,126,657     —    
Amounts due from internal companies
(2)
     38,100        —          2,841,112        (2,879,212     —    
Amounts due from related parties
     —          8,465        580        —         9,045  
Property and equipment, net
     —          15,236        22,556        —         37,792  
Intangible assets, net
     —          102,837        38,835        —         141,672  
Long-term bank deposits
     —          100,000        —          —         100,000  
Investments
     —          302,111        198,548        —         500,659  
Goodwill
     —          —          12,933        —         12,933  
Right-of-use
assets
     —          32,362        29,779        —         62,141  
Other
non-current
assets
     —          4,766        14,238        —         19,004  
Total assets
  
 
7,001,543
 
  
 
2,430,913
 
  
 
640,258
 
  
 
(4,005,869
 
 
8,907,957
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
Accounts payable
              868,772        251,426        (134,125     986,073  
Advances from customers
              9,700        1,211        —         10,911  
Deferred revenue
     12,311        225,282        4,420        —         242,013  
Accrued expenses and other current liabilities
     19,119        208,531        156,391        —         384,041  
Amounts due to internal companies
(2)
     317        —          2,841,112        (2,841,429     —    
Amounts due to related parties
              215,467        8,058        —         223,525  
Lease liabilities due within one year
              17,175        19,106        —         36,281  
Lease liabilities
              13,038        3,914        —         16,952  
Other liabilities
     30,779        —          —          —         30,779  
Total liabilities
  
 
62,526
 
  
 
1,557,965
 
  
 
3,285,638
 
  
 
(2,975,554
 
 
1,930,575
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
Total shareholders’ equity
  
 
6,939,017
 
  
 
872,948
 
  
 
195,732
 
  
 
(1,030,315
 
 
6,977,382
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
Total liabilities and shareholders’ equity
  
 
7,001,543
 
  
 
2,430,913
 
  
 
3,481,370
 
  
 
(4,005,869
 
 
8,907,957
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
 
6

    
As of December 31, 2021
 
    
Our
Company
    
VIEs and
VIEs’
subsidiaries
    
Our
subsidiaries
    
Eliminating
adjustments between
(i)our Company and
our subsidiaries and
(ii)the VIEs and
VIEs’ subsidiaries
   
Consolidated
 
  
                                 
    
(RMB in thousands)
 
Assets
                                           
Cash and cash equivalents
     4,206,259        189,363        60,784        —         4,456,406  
Restricted cash
     —          10,703        —          —         10,703  
Short—term bank deposits
     956,355        820,000        300,000        —         2,076,355  
Accounts receivable, net
     —          179,041        12,348        —         191,389  
Prepayments
     11,476        62,633        6,608        —         80,717  
Other current assets
     14,644        293,554        68,169        —         376,367  
Investments in subsidiaries and the VIEs and VIEs’ subsidiaries
(1)
     1,158,039        —          —          (1,158,039     —    
Amounts due from internal companies
(2)
     —          —          3,584,797        (3,584,797     —    
Amounts due from related parties
     —          36,879        280        —         37,159  
Property and equipment, net
     —          7,688        17,423        —         25,111  
Intangible assets, net
     —          124,766        36,774        —         161,540  
Long—term bank deposits
     —          100,000        —          —         100,000  
Investments
     —          252,607        238,818        —         491,425  
Goodwill
     —          —          12,637        —         12,637  
Right-of-use
assets
     —          60,037        12,272        —         72,309  
Other
non-current
assets
     —          59,613        5,172        —         64,785  
Total assets
  
 
6,346,773
 
  
 
2,196,884
 
  
 
4,356,082
 
  
 
(4,742,836
 
 
8,156,903
 
Accounts payable
     —          851,736        104,531        (132,139     824,128  
Advances from customers
     —          7,474        2        —         7,476  
Deferred revenue
     12,030        216,716        6,388        —         235,134  
Accrued expenses and other current liabilities
(2)
     57,801        255,958        144,569        —         458,328  
Amounts due to internal companies
     310        —          3,584,487        (3,584,797     —    
Amounts due to related parties
     —          283,758        9,750        —         293,508  
Lease liabilities due within one year
     —          26,589        3,828        —         30,417  
Lease liabilities
     —          30,576        702        —         31,278  
Other liabilities
     18,045        —          —          —         18,045  
Total liabilities
  
 
88,186
 
  
 
1,672,807
 
  
 
3,854,257
 
  
 
(3,716,936
 
 
1,898,314
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
Total shareholders’ equity
  
 
6,258,587
 
  
 
524,077
 
  
 
509,825
 
  
 
(1,025,900
 
 
6,258,589
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
Total liabilities and shareholders’ equity
  
 
6,346,773
 
  
 
2,196,884
 
  
 
4,356,082
 
  
 
(4,742,836
 
 
8,156,903
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
 
Notes:
 
(1)
The eliminations are mainly related to the investments and loans to subsidiaries and VIEs.
(2)
The eliminations are mainly related to the service fees balance between subsidiaries and VIEs.
 
    
For the Year Ended December 31, 2019
 
    
Our
Company
   
VIEs and
VIEs’
subsidiaries
   
Our
subsidiaries
   
Eliminating
adjustments between
(i)our Company and
our subsidiaries and
(ii)the VIEs and
VIEs’ subsidiaries
   
Consolidated
 
  
                              
    
(RMB in thousands)
 
Net cash provided by operating activities
(1)
     154,444       816,656       4,904,276       (5,062,200     813,176  
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net cash used in investing activities
(2)
     (151,882     (133,917     (112,636     152,132       (246,303
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net cash provided by (used in) financing activities
(2)
     3,270,974       (1,363,044     140,534       (152,132     1,896,332  
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
7

    
For the Year Ended December 31, 2020
 
    
Our
Company
   
VIEs and
VIEs’
subsidiaries
   
Our
subsidiaries
   
Eliminating
adjustments between
(i)our Company and
our subsidiaries and
(ii)the VIEs and
VIEs’ subsidiaries
   
Consolidated
 
  
                              
    
(RMB in thousands)
 
Net cash provided by operating activities
(1)
     107,968       899,235       526,721       (866,275     667,649  
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net cash used investing activities
(2)
     (1,795,318     (1,179,666     (93,408     455,772       (2,612,620
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net cash (used in) provided by financing activities
(2)
     (579,825     —         556,402       (455,772     (479,195
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
    
For the Year Ended December 31, 2021
 
    
Our
Company
   
VIEs and
VIEs’
subsidiaries
   
Our
subsidiaries
   
Eliminating
adjustments between
(i)our Company and
our subsidiaries and
(ii)the VIEs and
VIEs’ subsidiaries
   
Consolidated
 
  
                              
    
(RMB in thousands)
 
Net cash (used in) provided by operating activities
(1)
     (1,763     (402,928     756,307       (937,874     (586,258
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net cash (used in) provided by investing activities
(2)
     (10,685     14,040       (404,344     381,860       (19,129
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net cash (used in) provided by financing activities
(2)
     (107,152     —         381,860       (381,860     (107,152
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
Notes:
 
(1)
The eliminations are mainly related to the investments and loans to subsidiaries and VIEs.
(2)
The eliminations are mainly related to the payment of service fees between subsidiaries and VIEs.
Restrictions on Foreign Exchange and the Ability to Transfer Cash between Entities, Across Borders and to U.S. Investors
In the future, if or when we become profitable, DouYu International Holdings Limited’s ability to pay dividends, if any, to its shareholders and ADS holders and to service any debt it may incur will depend upon dividends paid by our PRC subsidiaries. Under PRC laws and regulations, our PRC subsidiaries are subject to certain restrictions with respect to paying dividends or otherwise transferring any of their net assets offshore to DouYu International Holdings Limited. In particular, under the current effective PRC laws and regulations, dividends may be paid only out of distributable profits. Distributable profits are the net profit as determined under PRC GAAP, less any recovery of accumulated losses and appropriations to statutory and other reserves required to be made. Each of our PRC subsidiaries is required to set aside at least 10% of its
after-tax
profits each year, after making up previous years’ accumulated losses, if any, to fund certain statutory reserve funds, until the aggregate amount of such a fund reaches 50% of its registered capital. As a result, our PRC subsidiaries may not have sufficient distributable profits to pay dividends to us in the near future.
Furthermore, if certain procedural requirements are satisfied, the payment 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 or its local branches. However, 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, approval from or registration with competent government authorities or its authorized banks is required. The PRC government may take measures at its discretion from time to time to restrict access to foreign currencies for current account or capital account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our offshore intermediary holding companies or ultimate parent company, and therefore, our shareholders or investors in our ADSs. Further, we cannot assure you that new regulations or policies will not be promulgated in the future, which may further restrict the remittance of RMB into or out of the PRC. We cannot assure you, in light of the restrictions in place, or any amendment to be made from time to time, that our current or future PRC subsidiaries will be able to satisfy their respective payment obligations that are denominated in foreign currencies, including the remittance of dividends outside of the PRC. If any of our subsidiaries incurs debt on its own behalf in the future, the instruments governing such debt may restrict its ability to pay dividends to DouYu International Holdings Limited. In addition, our PRC subsidiaries are required to make appropriations to certain statutory reserve funds, which are not distributable as cash dividends except in the event of a solvent liquidation of the companies.
For PRC and United States federal income tax consideration of an investment in the ADSs, see “Item 10. Additional Information—10.E. Taxation.”
 
8

Taxation on Dividends or Distributions
As advised by our PRC counsel, for any amounts owed by the VIEs to our PRC subsidiaries under the VIE agreements, unless otherwise required by PRC tax authorities, we are able to settle such amounts without limitations under the current effective PRC laws and regulations, provided that the VIEs have sufficient funds to do so. DouYu International Holdings Limited has not previously declared or paid any cash dividend or dividend in kind, and has no plan to declare or pay any dividends in the near future on our shares or the ADSs representing our ordinary shares. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business. See “Item 8.—Financial Information—8.A. Consolidated Statements and Other Financial Information—Dividend Policy.” For PRC and United States federal income tax considerations of an investment in our ADSs, see “Item 10. Additional Information—10.E. Taxation.”
Implication of the Holding Foreign Companies Accountable Act
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 United States. On December 16, 2021, PCAOB issued the HFCAA Determination Report, according to which our auditors are subject to the determinations. In March 2022, the SEC issued its first “Conclusive list of issuers identified under the HFCAA” indicating that those companies are now formally subject to the delisting provisions if they remain on the list for three consecutive years. Accordingly, we expect to be identified as a “Commission Identified Issuer” shortly after the filing of this annual report. Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this annual report, as an auditor of companies that are traded publicly in the United States and a firm registered with the 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 PRC authorities, our auditor is currently not inspected by the PCAOB. Final rules implementing the submission and disclosure requirements in the HFCAA were adopted by the SEC on December 2, 2021, and became effective on January 10, 2022. The delisting of the ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment. The PCAOB is currently unable to inspect our auditors in relation to their audit work performed for our financial statements and inability of the PCAOB to conduct inspections over our auditors deprives our investors with the benefits of such inspections. For the details of the risks associated with the enactment of the HFCAA, see “Item 3. Key Information—D. Risk Factors—Our ADSs may be delisted and our ADSs and shares may be prohibited from trading in the
over-the-counter
market under the Holding Foreign Companies Accountable Act, or the HFCAA, if the PCAOB is unable to inspect or fully investigate auditors located in China, which may materially and adversely affect the value of your investment.”
 
3.A.
[Reserved]
 
3.B.
Capitalization and Indebtedness
Not applicable.
 
9

3.C.
Reason for the Offer and Use of Proceeds
Not applicable.
 
3.D.
Risk Factors
Below please find a summary of the principal risks we face, organized under relevant headings.
Risks Related to Doing Business in China
 
 
 
Uncertainties in the interpretation and enforcement of PRC laws and regulations, including uncertainties regarding the enforcement of laws, and sudden or unexpected changes in policies, laws and regulations in China, could limit the legal protections available to you and us.
 
 
 
Regulation and censorship of information disseminated over mobile devices and the Internet in China may adversely affect our business and subject us to liability for streaming content or posted on our platform.
 
 
 
Adverse changes in global or China’s economic, political or social conditions or government policies could have a material adverse effect on our business, financial condition and results of operations.
 
 
 
Currently there is no law or regulation specifically governing virtual asset property rights and therefore it is not clear what liabilities, if any, online game operators may have for virtual assets.
 
 
 
The PCAOB is currently unable to inspect our auditor in relation to their audit work performed for our financial statements included elsewhere in this annual report.
 
 
 
Our ADSs may be delisted and our ADSs and shares may be prohibited from trading in the
over-the-counter
market under the Holding Foreign Companies Accountable Act, or the HFCAA, if the PCAOB is unable to inspect or fully investigate auditors located in China, which may materially and adversely affect the value of your investment.
 
 
 
The potential enactment of the Accelerating Holding Foreign Companies Accountable Act would decrease the number of
non-inspection
years from three years to two years, thus reducing the time period before our ADSs may be delisted or prohibited from
over-the-counter
trading. If this bill were enacted, our ADSs could be delisted from the exchange and prohibited from
over-the-counter
trading in the U.S. in 2023.
Risks Related to Our Business and Industry
 
   
If we fail to retain our existing users, keep them engaged or further grow our user base, our business, operation, profitability and prospects may be materially and adversely affected.
 
   
We may fail to attract, cultivate and retain top streamers, which may materially and negatively affect our user retention and thus our business and operations.
 
   
We may fail to offer attractive content, in particular popular game content, on our platform.
 
   
We have significant reliance on the eSports industry.
 
   
If we fail to effectively manage our growth and control our periodic spending to maintain such growth, our brand, business and results of operations may be materially and adversely affected.
 
   
We have incurred net losses since inception, and we may continue to incur losses in the future.
 
   
Our business may suffer if we fail to successfully implement our monetization strategies.
 
 
 
Our content monitoring system may not be effective in preventing misconduct by our platform users and misuse of our platform and such misconduct or misuse may materially and adversely impact our brand image, business and operating results.
 
   
Our limited operating history with a relatively new business model in a relatively new market makes it difficult to evaluate our business and growth prospects.
 
   
We face risks related to natural disasters, health epidemics and other outbreaks of contagious diseases.
Risks Related to Our Corporate Structure
 
 
 
There are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations, and rules relating to the agreements that establish the VIE structure for our operations in China, including potential future actions by the PRC government, which could affect the enforceability of our contractual arrangements with the VIEs and, consequently, significantly affect the financial condition and results of operations performance of Douyu. If the PRC government finds such agreements
non-compliant
with relevant PRC laws, regulations, and rules, or if these laws, regulations, and rules or the interpretation thereof change in the future, we could be subject to severe penalties or be forced to relinquish our interests in the VIEs.
 
10

 
 
Any failure by the VIEs or their shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.
 
 
 
The approval, filing or other requirements of the China Securities Regulatory Commission or other PRC government authorities may be required under PRC law in connection with our issuance of securities overseas.
 
 
 
We rely on contractual arrangements with the VIEs and their shareholders for our operations in China, which may not be as effective in providing operational control as direct ownership.
 
 
 
We may lose the ability to use and enjoy assets held by the VIEs and their subsidiaries that are important to our business if the VIEs and their subsidiaries declare bankruptcy or become subject to a dissolution or liquidation proceeding.
 
 
 
Contractual arrangements we have entered into with the VIEs may be subject to scrutiny by the PRC tax authorities. A finding that we owe additional taxes could negatively affect our financial condition and the value of your investment.
Risks Related to our American Depositary Shares
 
 
 
The market price for our ADSs may be volatile.
 
 
 
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the market price for our ADSs and trading volume could decline.
 
 
 
If securities or industry analysts do not publish favorable research, or if they adversely change their recommendations regarding the ADSs, the market price for the ADSs and trading volume could decline.
 
   
We were likely a passive foreign investment company, or PFIC, for 2021 and there is a significant risk that we will be a PFIC for 2022 and possibly subsequent taxable years.
Risks Related to Doing Business in China
Uncertainties in the interpretation and enforcement of PRC laws and regulations, including uncertainties regarding the enforcement of laws, and sudden or unexpected changes in policies, laws and regulations in China, could limit the legal protections available to you and us.
The PRC legal system is based on written statutes where prior court decisions have limited value as precedents. Our PRC subsidiaries and the VIEs, in particular Douyu Yule, a wholly foreign-owned enterprise, is subject to laws and regulations applicable to foreign-invested enterprises as well as various Chinese laws and regulations generally applicable to companies incorporated in China. However, since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties.
From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings, and the level of legal protection we enjoy, than in more developed legal systems.
The PRC government has significant oversight and discretion over the conduct of our business and may intervene with or influence our operations as the government deems appropriate to further regulatory, political and societal goals. The PRC government has recently published new policies that adversely affected our industry and our business, and we cannot rule out the possibility that it will, in the future, release regulations or policies regarding our industry that could further adversely affect our business, financial condition and results of operations. Furthermore, the PRC government has also recently indicated an intent to exert more oversight and control over securities offerings and other capital markets activities that are conducted overseas and foreign investment in China-based companies like us. Any such action, once taken by the PRC government, could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or in extreme cases, become worthless.
However, as there are still regulatory uncertainties in this regard, we cannot assure you that we will be able to comply with new laws and regulations in all respects, and we may be ordered to rectify, suspend or terminate any actions or services that are deemed illegal by the regulatory authorities and become subject to material penalties, which may materially harm our business, financial condition, results of operations and prospects.
Furthermore, the PRC legal system is based in part on government policies and internal rules that may have retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights, could materially and adversely affect our business and impede our ability to continue our operations.
 
11

Regulation and censorship of information disseminated over mobile devices and the Internet in China may adversely affect our business and subject us to liability for streaming content or posted on our platform.
Internet companies in China are subject to a variety of existing and new rules, regulations, policies, and license and permit requirements. In connection with enforcing these rules, regulations, policies and requirements, relevant government authorities may suspend services by revoking the licenses of, any Internet or mobile content service provider that is deemed to provide illicit content online or on mobile devices, and such activities may be intensified in connection with any ongoing government campaigns to eliminate prohibited content online. For example, in recent years, the Office of the Anti-Pornography and Illegal Publications Working Group, the State Internet Information Office, the MIIT, the Ministry of Culture and the Ministry of Public Security have jointly or independently been launching a series of “Cleaning Up the Internet” campaigns. Based on publicly available information, these campaigns are aimed to eliminate pornographic, harmful and illegal information and content from the Internet information services industry by, among other things, holding liable individuals and corporate entities that facilitate the distribution of pornographic information and content. For example, in 2020, the Ministry of Public Security launched a “Cleaning Up the Internet 2020” campaign, which is aimed at cracking down on illegal or criminal activities in relation to telecommunication network fraud, online gambling, online “water army” and other severe illegal or criminal activities. In 2021, the Office of the Anti-Pornography and Illegal Publications Working Group, together with relevant PRC government authorities, launched a “Cleaning Up the Internet 2021” campaign, which is aimed to eliminate pornographic, violent, terrorist, and superstitious information and content and other inappropriate contents from the livestreaming, online games, network literature industries,
pop-up
advertising and online social media platforms. During the campaigns, relevant government authorities have shut down certain websites, removed certain links and closed certain accounts. Certain Chinese Internet companies voluntarily initiated self-investigations to filter and remove content from their websites and cloud servers. At the press conference held recently, the officials from the CAC confirmed that the regulators would launch the “Cleaning Up the Internet 2022” campaign in 2022 with a key focus on regulating issues in certain areas, including among others, short videos, livestreaming, network environment for minors during summer holiday, application information services and application algorithms. On April 15, 2022, the CAC, the State Taxation Administration, or the SAT, and the State Administration for Market Regulation, or the SAMR jointly launched a
two-month
“Cleaning Up” campaign to regulate the chaos in the livestreaming and short video industry. The campaign is aimed to regulate “pornographic, ugliness, bizarre, fake, vulgar and gambling” contents and other illicit contents and rectify prominent issues in the industry, such as “key opinion leaders’ chaos”, excessive reward, illegal profit and malicious marketing.
We endeavor to eliminate illicit content from our platform. We have made substantial investments in resources to monitor content that users post on our platform and the way in which our users engage with each other through our platform. We use a variety of methods to ensure our platform remains a healthy and positive experience for our users. See “Item 4. Information of the Company—4.B. Business Overview—Content Monitoring System.” Although we employ these methods to filter content posted on our platform, we cannot be sure that our internal content control efforts will be sufficient to remove all content that may be viewed as indecent or otherwise
non-compliant
with PRC law and regulations. Government standards and interpretations as to what constitutes illicit online content or behavior are subject to interpretation and may change in a manner that could render our current monitoring efforts insufficient. The Chinese government has wide discretion in regulating online activities and, irrespective of our efforts to control the content on our platform, government campaigns and other actions to reduce illicit content and activities could subject us to negative press or regulatory challenges and sanctions, including fines, confiscation of illegal income, suspension or revocation of our licenses to operate in China or a suspension or ban on our mobile or online platform, including suspension or closure of one or more parts of or our entire business. Further, our senior management could be held criminally liable if we are deemed to be profiting from illicit content on our platform. Although our business and operations have not been materially and adversely affected by government campaigns or any other regulatory actions in the past, we cannot assure you that our business and operations will be immune from government actions or sanctions in the future. If government actions or sanctions are brought against us, or if there are widespread rumors that government actions or sanctions have been brought against us, our reputation could be harmed, we may lose users and customers, our revenues and results of operation may be materially and adversely affected and the value of our ADSs could be dramatically reduced.
Adverse changes in global or China’s economic, political or social conditions or government policies could have a material adverse effect on our business, financial condition and results of operations.
Our revenues are substantially sourced from China. Accordingly, our results of operations, financial condition and prospects are influenced by economic, political and legal developments in China. Economic reforms begun in the late 1970s have resulted in significant economic growth. However, any economic reform policies or measures in China may from time to time be modified or revised. China’s economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past 40 years, growth has been uneven across different regions and among different economic sectors, and the rate of growth has been slowing.
 
12

China’s economic conditions are sensitive to global economic conditions. The global financial markets have experienced significant disruptions since 2008 and the United States, Europe and other economies have experienced periods of recession. The global macroeconomic environment is facing new challenges and there is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies. Recent international trade disputes, including tariff actions announced by the United States, the PRC and certain other countries, and the uncertainties created by such disputes may cause disruptions in the international flow of goods and services and may adversely affect the Chinese economy as well as global markets and economic conditions. There have also been concerns about the economic effect of the military conflicts and political turmoil or social instability in the Middle East, Europe, Africa and other places. Any severe or prolonged slowdown in the global economy may adversely affect the Chinese economy which in turn may adversely affect our business and operating results.
The PRC government exercises significant control over China’s economic growth through strategically allocating resources, controlling the payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Although the PRC economy has grown significantly in the past decade, that growth may not continue, as evidenced by the slowing of the growth of the PRC economy since 2012. Any adverse changes in economic conditions in China, in the policies of the PRC government or in the laws and regulations in China could have a material adverse effect on the overall economic growth of China. Such developments could adversely affect our business and operating results, lead to a reduction in demand for our services and adversely affect our competitive position.
Currently there is no law or regulation specifically governing virtual asset property rights and therefore it is not clear what liabilities, if any, online game operators may have for virtual assets.
While participating on our platform, our users acquire, purchase and accumulate some virtual assets, such as gifts or certain status. Such virtual assets can be important to users and have monetary value. In practice, virtual assets can be lost for various reasons, often through unauthorized use of the user account of one user by other users and occasionally through data loss caused by delay of network service, network crash or hacking activities. Currently, there is no PRC law or regulation specifically governing virtual asset property rights. As a result, there is uncertainty as to who the legal owner of virtual assets is, whether and how the ownership of virtual assets is protected by law, and whether an operator of a livestreaming platform such as us would have any liability, whether in contract, tort or otherwise, to users or other interested parties, for loss of such virtual assets. Based on recent PRC court judgments, the courts have typically held online platform operators liable for losses of virtual assets by platform users, and ordered online platform operators to return the lost virtual items to users or pay damages and losses. In case of a loss of virtual assets, we may be sued by our users and held liable for damages, which may negatively affect our reputation and business, financial condition and results of operations.
Our business is subject to complex and evolving Chinese and international laws and regulations, including those regarding data privacy and cybersecurity. Many of these laws and regulations are subject to change and uncertain interpretation.
We are required by privacy and data protection laws in China and other jurisdictions, including, without limitation, the PRC Cyber Security Law, to ensure the confidentiality, integrity and availability of the information of our users, third-party agents, content providers and other data, which is also essential to maintaining their confidence in our services. However, the regulatory framework for the collection, protection, use, sharing, transfer and other processing of data worldwide is rapidly evolving and remains uncertain. For example, the SCNPC, promulgated the Cyber Security Law in November 2016, which requires network operators to perform certain functions related to cyber-security protection and strengthened network information management through taking technical and other necessary measures as required by laws and regulations to safeguard the operation of networks, respond to network security effectively, prevent illegal and criminal activities, and maintain the integrity and confidentiality and usability of network data.
Regulatory authorities in China have implemented and are considering a number of legislative and regulatory proposals concerning cybersecurity and data protection. The interpretation and application of cybersecurity, information security, privacy and data protection laws in China are often uncertain and in flux. It is possible that existing or newly introduced laws and regulations, or their interpretation, application or enforcement, could significantly affect our business practice and force us to change our business practices. For example, on August 20, 2021, the SCNPC promulgated the PRC Personal Information Protection Law, which integrates the scattered rules with respect to personal information rights and privacy protection. The PRC Personal Information Protection Law also provides specific protection requirements for processing personal information, and such requirements remain to be clarified by governmental authorities and courts in practice. We may be required to make adjustments to our business practices to comply with the personal information protection laws and regulations. In June 2021, the SCNPC promulgated the Data Security Law, which took effect on September 1, 2021. The Data Security Law introduces a data classification and hierarchical protection system based on the importance of data and provides a national security review procedure for those data activities, which may affect national security and imposes export restrictions on certain data and information.
 
13

On December 28, 2021, the CAC, the NDRC, the MIIT, and several other PRC governmental authorities jointly issued the Cybersecurity Review Measures, which became effective on February 15, 2022. Pursuant to the Cybersecurity Review Measures, critical information infrastructure operators that procure inertent products and servies and network platform operators engaging in data processing activities are also subject to cybersecurity review under the Cybersecurity Review Measures if their activities affect or may affect national security. The relevant competent governmental authorities may initiate the cybersecurity review against the relevant operators if the authorities believe that the network product or service or data processing activities of such operators affect or may affect national security. In addition, the Cybersecurity Review Measures provide that network platform operators holding over one million users’ personal information must apply with the Cybersecurity Review Office for a cybersecurity review before listing on a foreign stock exchange. As of the date of this annual report, we have not received any notice from any authorities identifying us as a critical information infrastructure operator or requiring us to undertake a cybersecurity review.
However, as the Cybersecurity Review Measures are recently issued, we still face uncertainties that the measures may be interpreted or implemented in ways that will negatively affect us.
In addition, on November 14, 2021, the CAC published Measures on Network Data Security Management (Draft for Comment), or the Draft Measures for Internet Data Security, which provides that data processors conducting certain activities must apply for cybersecurity review, including, among others, merger, reorganization or separation of internet platform operators that have acquired a large number of data resources related to national security, economic development or public interests and how this affects or may affect national security and listing abroad of data processors processing over one million users’ personal information. The Draft Measures for Internet Data Security also provides that data processors processing important data or going public overseas shall conduct an annual data security assessment by themselves or entrust a data security service institution to do so. As advised by Han Kun Law Offices, our PRC legal counsel, the Draft Measures for Internet Data Security have not been adopted and it remains unclear whether the formal version adopted in the future will have any further material changes, it is uncertain how the measures will be enacted, interpreted or implemented and how they will affect us. We cannot predict the impact of the draft measures, if any, at this stage. If a final version of the Draft Measures for Internet Data Security is adopted, we may be subject to review when conducting data processing activities and annual data security assessment and may face challenges in addressing its requirements and making necessary changes to our internal policies and practices in data processing. In addition, if the enacted version of the Draft Measures for Internet Data Security mandates clearance of cybersecurity review and other specific actions to be completed by China-based companies that have been listed on overseas stock exchanges, such as us, we face uncertainties as to whether we could obtain such clearance in a timely manner, or at all. Any failure or delay in the completion of the cybersecurity review procedures may prevent us from using or providing certain network products and services, and may result in penalties, including fines, suspension of business and revocation of required licenses, and our reputation and results of operations could be materially and adversely affected.
Compliance with the above PRC laws and regulations as well as additional laws and regulations that PRC regulatory bodies may enact in the future, including laws and regulations regarding cybersecurity, information security, privacy and data protection, may result in additional expenses to us and subject us to negative publicity, which could harm our reputation and business operations. There are also uncertainties with respect to how such laws and regulations will be implemented and interpreted in practice. PRC regulators have been increasingly focused on regulation in the areas of data security and data protection, and are enhancing the protection of privacy and data security by rule-making and enforcement actions at central and local levels. For example, in July 2021, certain PRC regulatory authorities issued Opinions on Strictly Cracking Down on Illegal Securities Activities in accordance with the Law, which further emphasized to improve relevant laws and regulations on data security, cross-border data transmission and confidential information management. We expect that these areas will receive greater and continued attention and scrutiny from regulators and the public going forward, which could increase our compliance costs and subject us to heightened risks and challenges associated with data security and protection.
While we have taken various measures to comply with all applicable laws and regulations regarding cybersecurity, information security, privacy and data protection in China, we cannot assure you that the measures we have taken or will take are adequate underthese laws and regulations, and we may be held liable in the event of any breach of the relevant requirements under or other relevant laws and regulations. Any failure or perceived failure by us to prevent information security breaches or to comply with data security and privacy policies or related legal obligations, or any compromise of security that results in the unauthorized use, release or transfer of personally identifiable information or other data, could cause our users to lose trust in us and could expose us to legal claims or penalties. Any perception by the public that privacy of user information or data security are becoming increasingly unsafe or vulnerable to attacks could inhibit the growth of our products and services generally. We may also be held liable in the event of any breach of general clauses on our compliance with such statutory requirements as well as some other specific requirements related to data protection under the relevant contracts. We may have to spend much more personnel cost and time evaluating and managing these risks and challenges in connection with our products and services in the ordinary course of our business operations, and have cooperated, and will continue cooperating in the future, with the competent regulators in these respects. If further changes in our business practices are required under China’s evolving regulatory framework for the protection of information in cyberspace, our business, financial condition and results of operations may be adversely affected. These proceedings or actions could subject us to significant penalties and negative publicity, require us to change our business practices, increase our costs and severely disrupt our business, hinder our global expansion or negatively affect the trading prices of our ADSs, shares and/or other securities. If we are unable to manage these risks, we could become subject to penalties, including fines, suspension of business and revocation of required licenses, and our reputation and results of operations could be materially and adversely affected.
 
14

Any failure or perceived failure by us to comply with Anti-monopoly Guidelines on Platform Economies and other anti-monopoly laws and regulations may result in governmental investigations or enforcement actions, litigation or claims against us and could have an adverse effect on our business, financial condition and results of operations.
In recent years, PRC anti-monopoly enforcement agencies have strengthened enforcement under the PRC Anti-monopoly Law. In March 2018, the SAMR was formed as a new governmental agency to take over, among other things, the anti-monopoly enforcement functions from the relevant departments under the Ministry of Commerce, the NDRC and the State Administration for Industry and Commerce (the predecessor of the SAMR), respectively. Since its inception, the SAMR has continued to strengthen anti-monopoly enforcement. In December 2018, the SAMR issued the Notice on Anti-monopoly Enforcement Authorization, which grants authority to its province-level branches to conduct anti-monopoly enforcement within their respective jurisdictions. In November 2021, the National Anti-monopoly Bureau was inaugurated by the State Council, which aims to further implement the fair competition policies, and strengthen anti-monopoly supervision in the PRC, especially to strengthen oversight and law enforcement in areas involving innovation, science and technology, information security and people’s livelihood.
The PRC anti-monopoly regulators may also issue implementation rules or guidelines from time to time to reinforce their regulation on certain industrial sectors. In February 2021, the Anti-monopoly Commission of the State Council published the Anti- monopoly Guidelines on Platform Economies. These guidelines prohibit monopolistic conduct such as entering into monopoly agreements, abusing market dominance and concentration of undertakings that may have the effect of eliminating or restricting competition in the field of platform economies. More specifically, the Anti-monopoly Guidelines on Platform Economies outline certain practices that may, if without justifiable reasons, constitute abuse of a dominant position, including without limitation, discriminating against customers in terms of pricing and other transactional conditions using big data and analytics, coercing counterparties into exclusivity arrangements, refusing to deal with counterparties on reasonable conditions, using bundle services to sell services or products, and compulsory collection of users’ unnecessary data. The Anti-monopoly Guidelines on Platform Economies further expressly state that concentration involving VIE will also be subject to antitrust filing requirements, and therefore will also fall within the scope of the antitrust review. In addition, Anti-monopoly Guidelines on Platform Economies reinforce antitrust merger review for internet platform related transactions to safeguard market competition. Since the Anti-monopoly Guidelines on Platform Economies are relatively new and may be subject to interpretation by the regulators in the process of implementing such guidelines, we cannot assure you that our business operations will comply with such regulation in all respects, and any failure or perceived failure by us to comply with such regulation may result in governmental investigations, fines and/or other sanctions on us. Furthermore, on October 23, 2021, the SCNPC issued a consultation draft of the amended Anti-monopoly Law, which proposes to increase the fines for illegal concentration of business operators to no more than ten percent of sales revenue of the preceding financial year if the concentration of business operator has or may have an effect of excluding or limiting competition; or a fine of up to RMB5 million if the concentration of business operators does not have an effect of excluding or limiting competition. The draft also proposes that the relevant authority shall investigate a transaction where there is any evidence that the concentration has or may have the effect of eliminating or restricting competitions, even if such concentration does not reach the filing threshold. See “Item 4. Information of the Company—4.B. Business Overview—Regulation.”
We may be involved in investigations, inquiries, claims, complaints or other administrative requirements in relation to anti-monopoly laws and regulations in the PRC from time to time. In the case of our failure or perceived failure to comply with these laws and regulations and new legislations or guidelines to be promulgated from time to time, governmental agencies and regulators may, among other things, prohibit or rescind our acquisitions, divestitures, or combinations, impose significant fines or penalties, require divestiture of certain of our assets, or impose other restrictions that limit or require us to modify our operations. Any anti-monopoly related lawsuits, regulatory investigations or administrative proceedings initiated against us could also result in our being subject to regulatory actions and constraints on our investments and acquisitions, which could include forced termination of any agreements or transactions, required divestitures, and business practices or significant fines. For example, in October 2020, we entered into an Agreement and Plan of Merger with Huya and other related parties, pursuant to which Huya would acquire all our outstanding ordinary shares, including ordinary shares represented by ADSs, through a
stock-for-stock
merger. On July 10, 2021, the SAMR, posted an announcement of its decision to prohibit the merger transaction following its anti-monopoly review. See “Item 4. Information of the Company—4.A. History and Development of Company—Merger between Our Company and Huya and its Termination.”
Moreover, any noncompliance or associated inquiries, investigations or other governmental actions may divert significant management time and attention and financial resources, bring negative publicity, subject us to liabilities or administrative penalties, and materially and adversely affect our financial conditions, results of operations, and business prospects.
Under the PRC enterprise income tax law, we may be classified as a PRC “resident enterprise,” which could result in unfavorable tax consequences to us and our shareholders and have a material adverse effect on our results of operations and the value of your investment.
Under the PRC enterprise income tax law that became effective on January 1, 2008, and was last amended on December 29, 2018, an enterprise established outside the PRC with “de facto management bodies” within the PRC is considered a “resident enterprise” for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. On April 22, 2009, the SAT, issued the Circular Regarding the Determination of Chinese-Controlled Overseas Incorporated Enterprises as PRC Tax Resident Enterprise on the Basis of De Facto Management Bodies, or SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a
PRC-controlled
enterprise that is incorporated offshore is located in China. Further to SAT Circular 82, on July 27, 2011, the SAT issued the Administrative Measures of Enterprise Income Tax of Chinese-Controlled Offshore Incorporated Resident Enterprises (Trial), or SAT Bulletin 45, which became effective on September 1, 2011, to provide more guidance on the implementation of SAT Circular 82.
 
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According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be considered a PRC tax resident enterprise by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following conditions are met: (a) the senior management and core management departments in charge of its daily operations function have their presence mainly in the PRC; (b) its financial and human resources decisions are subject to determination or approval by persons or bodies in the PRC; (c) its major assets, accounting books, company seals, and minutes and files of its board and shareholders’ meetings are located or kept in the PRC; and (d) not less than half of the enterprise’s directors or senior management with voting rights habitually reside in the PRC. SAT Bulletin 45 provides further rules on residence status determination, post-determination administration as well as competent tax authorities procedures.
Although SAT Circular 82 and SAT Bulletin 45 apply only to offshore incorporated enterprises controlled by PRC enterprises or a PRC enterprise group and not those controlled by PRC individuals or foreigners, Han Kun Law Offices, our legal counsel as to PRC law, has advised us that the determination criteria set forth therein may reflect SAT’s general position on how the term “de facto management body” could be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, individuals or foreigners.
We do not meet all of the conditions set forth in SAT Circular 82. Therefore, we believe that we should not be treated as a “resident enterprise” for PRC tax purposes even if the standards for “de facto management body” prescribed in the SAT Circular 82 applied to us. For example, certain of our minutes and files of the resolutions of our board of directors and the resolutions of our shareholders are maintained outside the PRC.
However, the PRC tax authorities may take a different view. Han Kun Law Offices, our legal counsel as to PRC law, has advised us that if the PRC tax authorities determine that our Cayman Islands holding company or any Hong Kong subsidiary is a PRC resident enterprise for PRC enterprise income tax purposes, its world-wide income could be subject to PRC tax at a rate of 25%, which could reduce our net income. In addition, we will also be subject to PRC enterprise income tax reporting obligations. Although dividends paid by one PRC tax resident to another PRC tax resident should qualify as
“tax-exempt
income” under the enterprise income tax law, dividends paid by our PRC subsidiary to us or any of our Hong Kong subsidiaries could be subject to a 10% withholding tax if we or any of our Hong Kong subsidiaries were treated as a PRC resident enterprise. The PRC foreign exchange control authorities, which enforce the withholding tax on dividends, and the PRC tax authorities have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes.
If we are treated as a resident enterprise,
non-PRC
resident ADS holders may also be subject to PRC withholding tax on dividends paid by us and PRC tax on gains realized on the sale or other disposition of ADSs or ordinary shares if such income is sourced from within the PRC. The tax would be imposed at the rate of 10% in the case of
non-PRC
resident enterprise holders and 20% in the case of
non-PRC
resident individual holders. In the case of dividends, we would be required to withhold the tax at source. Any PRC tax liability may be reduced under applicable tax treaties or similar arrangements, but it is unclear whether our
non-PRC
shareholders company would be able to obtain the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Although our holding company is incorporated in the Cayman Islands, it remains unclear whether dividends received and gains realized by our
non-PRC
resident ADS holders will be regarded as income from sources within the PRC if we are classified as a PRC resident enterprise. Any such tax will reduce the returns on your investment in our ADSs.
There are uncertainties with respect to indirect transfers of PRC taxable properties outside a public stock exchange.
We face uncertainties on the reporting and consequences on private equity financing transactions, private share transfers and share exchange involving the transfer of shares in our company by
non-resident
investors. According to the Notice on Several Issues Concerning Enterprise Income Tax for Indirect Share Transfer by
Non-PRC
Resident Enterprises, or SAT Circular 7, issued by the State Taxation Administration on February 3, 2015, an “indirect transfer” of assets of a PRC resident enterprise, including a transfer of equity interests in a
non-PRC
holding company of a PRC resident enterprise, by
non-PRC
resident enterprises may be
re-characterized
and treated as a direct transfer of PRC taxable properties, if such transaction lacks reasonable commercial purpose and was undertaken for the purpose of reducing, avoiding or deferring PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and tax filing or withholding obligations may be triggered, depending on the nature of the PRC taxable properties being transferred. According to SAT Circular 7, “PRC taxable properties” include assets of a PRC establishment or place of business, real properties in the PRC, and equity investments in PRC resident enterprises, in respect of which gains from their transfer by a direct holder, being a
non-PRC
resident enterprise, would be subject to PRC enterprise income taxes. When determining if there is a “reasonable commercial purpose” of the transaction arrangement, features to be taken into consideration include: whether the main value of the equity interest of the relevant offshore enterprise derives from PRC taxable properties; whether the assets of the relevant offshore enterprise mainly consists of direct or indirect investment in China or if its income mainly derives from China; whether the offshore enterprise and its subsidiaries directly or indirectly holding PRC taxable properties have a real commercial nature which is evidenced by their actual function and risk exposure; the duration of existence of the business model and organizational structure; the replicability of the transaction by direct transfer of PRC taxable properties; and the tax situation of such indirect transfer outside China and its applicable tax treaties or similar arrangements. In respect of an indirect offshore transfer of assets of a PRC establishment or place of business of a foreign enterprise, the resulting gain is to be included with the annual enterprise filing of the PRC establishment or place of business being transferred, and would consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates to PRC real properties or to equity investments in a PRC resident enterprise, which is not related to a PRC establishment or place of business of a
non-resident
enterprise, a PRC enterprise income tax at 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. Where the payer fails to withhold any or sufficient tax, the transferor shall declare and pay such tax to the competent tax authority by itself within the statutory time limit. Late payment of applicable tax will subject the transferor to default interest. Currently, SAT Circular 7 does not apply to the sale of shares by investors through a public stock exchange where such shares were acquired in a transaction on a public stock exchange.
 
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The PRC tax authorities could, at their discretion, adjust any capital gains and impose tax return filing and withholding or tax payment obligations and associated penalties with respect to any internal restructuring, and our PRC subsidiary may be requested to assist in the filing. Any PRC tax imposed on a transfer of our shares not through a public stock exchange, or any adjustment of such gains would cause us to incur additional costs and may have a negative impact on the value of your investment in our company.
Implementation of the labor laws and regulations in China may adversely affect our business and results of operations.
Pursuant to the PRC Labor Contract Law that took effect in January 2008, its implementation rules that took effect in September 2008 and its amendment that took effect in July 2013, employers are subject to stricter requirements in terms of signing labor contracts, minimum wages, paying remuneration, determining the term of employees’ probation and unilaterally terminating labor contracts. Due to lack of detailed interpretative rules and uniform implementation practices and broad discretion of the local competent authorities, it is uncertain as to how the PRC Labor Contract Law and its implementation rules will affect our current employment policies and practices. Our employment policies and practices may violate the PRC Labor Contract Law or its implementation rules, and we may thus be subject to related penalties, fines or legal fees. Compliance with the PRC Labor Contract Law and its implementation rules may increase our operating expenses, in particular our personnel expenses. We may, from time to time, optimize our employees’ utilization and adjust our employee structure. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the PRC Labor Contract Law and its implementation rules may also limit our ability to effect those changes in a desirable or cost-effective manner, which could adversely affect our business and results of operations. On October 28, 2010, the SCNPC promulgated the PRC Social Insurance Law, or the Social Insurance Law, which became effective on July 1, 2011 and was amended on December 29, 2018. According to the Social Insurance Law, employees must participate in pension insurance, work-related injury insurance, medical insurance, unemployment insurance and maternity insurance and the employers must, together with their employees or separately, pay the social insurance premiums for such employees.
We expect our labor costs to increase due to the implementation of these laws and regulations. Although as of the date of this annual report, we are not aware of any notice from regulatory authorities or any material claim or request from these employees in this regard, as the interpretation and implementation of these new laws and regulations are still evolving, we cannot assure you that our employment practices will at all times be deemed in full compliance with labor-related laws and regulations in China, which may subject us to labor disputes or government investigations. If we are deemed to have violated relevant labor laws and regulations, we could be required to provide additional compensation to our employees, and our business, financial condition and results of operations could be materially and adversely affected.
Further, labor disputes, work stoppages or slowdowns at our company or any of our third-party service providers could significantly disrupt our daily operation or our expansion plans and have a material adverse effect on our business.
It may be difficult for overseas regulators to conduct investigations or collect evidence in China.
Shareholder claims or regulatory investigations that are common in the United States (including securities law class actions and fraud claims) are generally difficult to apply as a matter of law and/or in practice in China. For example, in China, there are significant legal and other obstacles in the process of gathering information needed for regulatory investigations or litigations initiated outside China. Although the governmental 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 a 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 may directly conduct investigations or collect evidence and, without proper authorization as stipulated under Article 177, no entities or individuals may provide documents or materials in connection with securities activities. While detailed interpretation of or implementation rules under Article 177 have not been promulgated, the inability of an overseas securities regulator to directly conduct investigations or collect evidence in China may further increase difficulties faced by you in protecting your interests.
 
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China’s M&A Rules and certain other PRC regulations establish complex procedures for certain acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.
The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, and other recently adopted regulations and rules concerning mergers and acquisitions established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and complex. For example, the M&A Rules require that the Ministry of Commerce be notified in advance of any
change-of-control
transaction in which a foreign investor takes control of a PRC domestic enterprise, if (i) any important industry is concerned, (ii) such transaction involves factors that impact or may impact national economic security or (iii) such transaction will lead to a change in control of a domestic enterprise which holds a famous trademark or PRC time-honored brand. Moreover, the PRC Anti-monopoly Law promulgated by the SCNPC in 2008 requires that transactions which are deemed concentrations and involve parties with specified turnover thresholds (i.e., during the previous fiscal year, (i) the total global turnover of all operators participating in the transaction exceeds RMB10 billion and at least two of these operators each had a turnover of more than RMB400 million within China or (ii) the total turnover within China of all the operators participating in the concentration exceeded RMB2 billion, and at least two of these operators each had a turnover of more than RMB400 million within China) must be cleared by the anti-monopoly enforcement authority before they can be completed. On December 14, 2020, the SAMR announced three cases of administrative penalties for the acquirers’ failures to make proper concentration declarations to the relevant authorities about their past acquisitions. This is also the first time that the SAMR imposed administrative penalties for declarations on illegal concentrations involved entities structured under a VIE arrangement.
In addition, in 2011, the General Office of the State Council promulgated the Notice on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, also known as Circular 6, which officially established a security review system for mergers and acquisitions of domestic enterprises by foreign investors. Further, the Ministry of Commerce promulgated the Regulations on Implementation of Security Review System for the Merger and Acquisition of Domestic Enterprises by Foreign Investors, effective in 2011, to implement Circular 6. Under Circular 6, a security review is required for mergers and acquisitions by foreign investors having “national defense and security” concerns and mergers and acquisitions by which foreign investors may acquire the “de facto control” of domestic enterprises with “national security” concerns. Under the foregoing Ministry of Commerce regulations, the Ministry of Commerce will focus on the substance and actual impact of the transaction when deciding whether a specific merger or acquisition is subject to security review. If the Ministry of Commerce decides that a specific merger or acquisition is subject to a security review, it will submit it to the Inter-Ministerial Panel, an authority established under Circular 6 led by the NDRC, and the Ministry of Commerce under the leadership of the State Council, to carry out security review. The regulations prohibit foreign investors from bypassing the security review by structuring transactions through trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions. There is no explicit provision or official interpretation stating that the merging or acquisition of a company engaged in the Internet content or mobile games business requires security review, and there is no requirement that acquisitions completed prior to the promulgation of the Security Review Circular are subject to the Ministry of Commerce review. On December 26, 2019, the State Council issued the Order No. 723, the Implementation Regulations for the PRC Foreign Investment Law, or the Foreign Investment Law Implementation Regulations, which became effective on January 1, 2020. The Foreign Investment Law Implementation Regulations declare that China will establish a foreign investment security review system, and conduct security review for foreign investments which have or may have an adverse impact on national security. In addition, the Ministry of Commerce promulgated the Measures on Reporting of Foreign Investment Information, effective on January 1, 2020, which provides detailed submission requirements for foreign investors. Foreign investors undertaking a merger and acquisition of a
non-foreign
investment enterprise in China is required to submit an initial report through the enterprise registration system upon completion of amendment registration for the target enterprise.
In December 2020, the NDRC and the Ministry of Commerce promulgated the Measures for the Security Review of Foreign Investment, which came into effect on January 18, 2021. See “Item 4. Information of the Company—4.B. Business Overview—Regulation” for more details. As these measures are recently promulgated, official guidance has not been issued by the designated office in charge of such security review yet. At this stage, the interpretation of those measures remains unclear in many aspects such as what would constitute “important information technology and Internet services and products” and whether these measures may apply to foreign investment that is implemented or completed before the enactment of these new measures. As our business may be deemed to constitute the foregoing circumstances, we cannot assure you that our current business operations will remain fully compliant, or we can adapt our business operations to new regulatory requirements on a timely basis, or at all.
In the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such transactions could be time consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce or its local counterparts may delay or inhibit our ability to complete such transactions. We believe that it is unlikely that our business would be deemed to be in an industry that raises “national defense and security” or “national security” concerns. However, the Ministry of Commerce or other government agencies may publish explanations in the future determining that our business is in an industry subject to the security review, in which case our future acquisitions in China, including those by way of entering into contractual control arrangements with target entities, may be closely scrutinized or prohibited.
 
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PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiary’s ability to increase their registered capital or distribute profits to us or otherwise expose us to liability and penalties under PRC law.
The State Administration of Foreign Exchange, or the SAFE, promulgated the Circular on Relevant Issues Relating to Foreign Exchange Control on Domestic Resident’s Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or the SAFE Circular 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions. According to the Notice on Further Simplifying and Improving Policies for the Foreign Exchange Administration of Direct Investment released on February 13, 2015 by the SAFE, as amended in December 2019, local banks will examine and handle foreign exchange registration for overseas direct investment, including the initial foreign exchange registration and amendment registration, under SAFE Circular 37 from June 1, 2015.
If our shareholders who are PRC residents or entities do not complete their registration with the local SAFE branches, our PRC subsidiary may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our ability to contribute additional capital to our PRC subsidiary. Moreover, failure to comply with the SAFE registration described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions. However, we may not at all times be fully aware or informed of the identities of all our shareholders or beneficial owners that are required to make such registrations, and we cannot compel our beneficial owners to comply with SAFE registration requirements. As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC residents or entities have complied with, and will in the future make or obtain any applicable registrations or approvals required by, SAFE regulations. Failure by such shareholders or beneficial owners to comply with SAFE regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiary, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.
PRC regulation of direct investment and loans by offshore holding companies to PRC entities may delay or limit us from using the proceeds of our initial public offering to make additional capital contributions or loans to our PRC subsidiary.
We are an offshore holding company conducting our operations in China through our PRC subsidiary, variable interest entities and their subsidiaries. We may make loans to our PRC subsidiary, variable interest entities and their subsidiaries, or we may make additional capital contributions to our PRC subsidiary.
Any capital contributions or loans that we, as an offshore entity, make to our PRC subsidiary, including from the proceeds of our initial public offering, are subject to PRC regulations. Capital contributions to our PRC subsidiaries are subject to the approval of or filing with the Ministry of Commerce and the SAMR in its local branches and registration with a local bank authorized by SAFE. There is no statutory limit on the amount of capital contribution that we can make to our PRC subsidiaries. Any medium or long-term loan to be provided by us to the VIEs must be registered with the NDRC and SAFE or its local branches. With respect to loans to the PRC subsidiaries by us, the outstanding amount of the loans shall not exceed the difference between the total investment and the registered capital of the PRC subsidiaries or 250% of the net asset of the relevant PRC subsidiary.
The Circular on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign-Invested Enterprises, or SAFE Circular 19, effective as of June 1, 2015, allows foreign invested enterprises, or FIEs, to settle their foreign exchange capital at their discretion, but continues to prohibit FIEs from using the Renminbi fund converted from their foreign exchange capitals for expenditure beyond their business scopes, and also prohibit FIEs from using such Renminbi fund to provide loans to persons other than affiliates unless otherwise permitted under its business scope. As a result, we are required to apply Renminbi funds converted from the net proceeds we received from our initial public offering within the business scopes of our PRC subsidiaries. According to the Circular on Optimizing the Administration of Foreign Exchange to Support the Development of Foreign-related Business issued by the SAFE on April 10, 2020, eligible enterprises are allowed to make domestic payments using the income under their capital accounts generated from their capital, foreign debt and overseas listing, without providing materials for each transaction evidencing the authenticity in advance, provided that the capital usage is authentic and compliant with the current capital account income usage management regulations. On October 23, 2019, the SAFE issued Notice of the State Administration of Foreign Exchange on Further Promoting the Facilitation of Cross-border Trade and Investment, or Circular 28. Circular 28 allows
non-investment
foreign-invested enterprises to use their capital funds to make equity investments in China, provided that such investments do not violate the Negative List and the target investment projects are genuine and in compliance with PRC laws. Since Circular 28 was relatively new, its interpretation and implementation in practice are still subject to substantial uncertainties. See “Item 4. Information on the Company—4.B. Business Overview—Regulation—Regulations Relating to Foreign Currency Exchange and Dividend Distribution.”
In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, we cannot assure you that we will be able to complete the necessary registration or obtain the necessary approval on a timely basis, or at all. If we fail to complete the necessary registration or obtain the necessary approval, our ability to make loans or equity contributions to our PRC subsidiary may be negatively affected, which could adversely affect our PRC subsidiary’s liquidity and its ability to fund its working capital and expansion projects and meet its obligations and commitments.
 
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Our PRC subsidiary and PRC variable interest entities are subject to restrictions on paying dividends or making other payments to us, which may restrict our ability to satisfy our liquidity requirements.
We are a holding company incorporated in the Cayman Islands. We rely on dividends from our PRC subsidiary which in turn relies on consulting and other fees paid by the VIEs for our cash and financing requirements, such as the funds necessary to pay dividends and other cash distributions to our shareholders, including holders of our ADSs, and service any debt we may incur. Current PRC regulations permit our PRC subsidiary to pay dividends to us only out of their accumulated
after-tax
profits upon satisfaction of relevant statutory condition and procedures, if any, determined in accordance with Chinese accounting standards and regulations. In addition, our PRC subsidiary is required to set aside at least 10% of its accumulated profits each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of its registered capital. As of December 31, 2021, we had not made appropriations to statutory reserves as our subsidiary and the VIEs (including their subsidiaries) reported accumulated loss. Furthermore, if our PRC subsidiary, variable interest entities and their subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us, which may restrict our ability to satisfy our liquidity requirements.
In addition, the PRC Enterprise Income Tax Law, and its implementation rules provide that the withholding tax rate of 10% will be applicable to dividends payable by Chinese companies to
non-PRC-resident
enterprises unless otherwise exempted or reduced according to treaties or arrangements between the PRC central government and governments of other countries or regions where the
non-PRC-resident
enterprises are incorporated. As of December 31, 2021, our subsidiary and the VIEs (including their subsidiaries) located in the PRC reported accumulated loss and therefore they could not pay any dividends.
Fluctuations in exchange rates could have a material adverse effect on our results of operations and the value of your investment.
The value of the RMB against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and by China’s foreign exchange policies, among other things. In July 2005, the PRC government changed its
decades-old
policy of pegging the value of the RMB to the U.S. dollar, and the RMB appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the RMB and the U.S. dollar remained within a narrow band. Since June 2010, the RMB has fluctuated against the U.S. dollar, at times significantly and unpredictably. On November 30, 2015, the Executive Board of the International Monetary Fund (IMF) completed the regular five-year review of the basket of currencies that makes up the Special Drawing Right, or the SDR, and decided that effective October 1, 2016, RMB would be a freely usable currency and would be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro, the Japanese yen and the British pound. In the fourth quarter of 2016, the RMB depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. In 2017, the RMB appreciated approximately 6.3% against the U.S. dollar. In 2018 and 2019, however, the RMB depreciated approximately 5.7% and 1% against the U.S. dollar. In 2020 and 2021, the RMB continues to fluctuate against the U.S. dollar. It remains unclear what further fluctuations may occur.
With the development of the foreign exchange market and progress towards interest rate liberalization and RMB internationalization, the PRC government may in the future announce further changes to the exchange rate system and the RMB could appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.
There remains significant international pressure on the Chinese government to adopt a flexible currency policy to allow the RMB to appreciate against the U.S. dollar. Significant revaluation of the RMB may have a material adverse effect on your investment. Substantially all of our revenues and costs are denominated in RMB. Any significant revaluation of RMB may materially and adversely affect our revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. To the extent that we need to convert U.S. dollars into RMB for capital expenditures and working capital and other business purposes, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, a significant depreciation of the RMB against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings, which in turn could adversely affect the price of our ADSs, and if we decide to convert RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs, strategic acquisitions or investments or other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us.
Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or hedge it at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.
 
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Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.
The PRC government imposes control on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in RMB. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval by complying with certain procedural requirements. Therefore, our PRC subsidiary is able to pay dividends in foreign currencies to us without prior approval from the SAFE. However, approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.
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.
Pursuant to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas
non-publicly-listed
companies may submit applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose companies. In the meantime, our directors, executive officers and other employees who are PRC citizens or who are
non-PRC
residents residing in the PRC for a continuous period of not less than one year, subject to limited exceptions, and who have been granted incentive share awards by us, may follow the Circular on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company, or the SAFE Circular 7, promulgated by the SAFE in 2012. Pursuant to the SAFE Circular 7, PRC citizens and
non-PRC
citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with the SAFE through a domestic qualified agent, which could be the PRC subsidiaries of such overseas listed company, and complete certain other procedures. In addition, an overseas entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and other employees who are PRC citizens or who reside in the PRC for a continuous period of not less than one year and who have been granted options are subject to these regulations. Failure to complete the SAFE registrations may subject them to fines, and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiary and limit our PRC subsidiary’s ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law. See “Item 4. Information on the Company—4.B. Business Overview—Regulation—Regulations Relating to Foreign Currency Exchange and Dividend Distribution—Stock Option Rules.”
The SAT has issued certain circulars concerning equity incentive awards. Under these circulars, our employees working in China who exercise share options or are granted restricted shares or restricted stock units, or RSUs, will be subject to PRC individual income tax. Our PRC subsidiary has obligations to file documents related to employee share options, restricted shares or RSUs with relevant tax authorities and to withhold individual income taxes of those employees. If our employees fail to pay or we fail to withhold their income taxes according to relevant laws and regulations, we may face sanctions imposed by the tax authorities or other PRC governmental authorities. See “Item 4. Information on the Company—4.B. Business Overview—Regulation—Regulations Relating to Foreign Currency Exchange and Dividend Distribution—Stock Option Rules.”
Our leased property interests may be defective and our right to lease the properties affected by such defects may be challenged, which could adversely affect our business.
Under PRC laws, all lease agreements are required to be registered with local housing authorities. We lease seven premises in China. Some landlords of these premises have not registered the relevant lease agreements with the government authorities or have not completed registration of their ownership rights to the premises, and some of the premises have defective title. We may be subject to monetary fines due to failure by the landlords to complete the required registrations.
We may also be forced to relocate our operations if the landlords do not obtain valid title to or complete the required registrations with local housing authorities in a timely manner or at all. We might not be able to locate desirable alternative sites for our operations in a timely and cost-effective manner which may adversely affect our business.
The PCAOB is currently unable to inspect our auditor in relation to their audit work performed for our financial statements included elsewhere in this annual report.
 
21

Our auditor is an independent public accounting firm registered with the Public Company Accounting Oversight Board (United States), or the PCAOB. As an auditor of companies traded publicly in the United States, it issues the audit report included elsewhere in this annual report. Our auditor 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 not currently inspected by the PCAOB.
The lack of the PCAOB inspections in China prevents the PCAOB from fully evaluating audits and quality control procedures of our independent registered public accounting firm, depriving us and investors in our ADSs 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. This could cause investors and potential investors in our ADSs to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.
Our ADSs may be delisted and our ADSs and shares may be prohibited from trading in the
over-the-counter
market under the Holding Foreign Companies Accountable Act, or the HFCAA, if the PCAOB is unable to inspect or fully investigate auditors located in China, which may materially and adversely affect the value of your investment.
As part of a continued regulatory focus in the United States on access to audit information and other information currently protected by national law in some jurisdictions, such as those in China, the Holding Foreign Companies Accountable Act, or the HFCAA, was signed into law on December 18, 2020. The HFCAA states that 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., in the event that the SEC determines our audit reports are issued by a registered public accounting firm that has not been subject to the PCAOB inspection for three consecutive years starting from 2021. Pursuant to the HFCAA, the foregoing prohibition on trading could begin to take place in 2024, at the earliest.
On December 2, 2021, the SEC adopted final amendments to its rules implementing the HFCAA (the “Final Amendments”). The Final Amendments state that an
SEC-reporting
company shall publicly disclose certain information for each year that the PCAOB is unable to inspect its accounting firm, such as the following:
 
   
the auditor’s name and location;
 
   
the percentage of issuer’s shares owned by governmental entities;
 
   
whether governmental entities in the applicable foreign jurisdiction where the auditor resides have a controlling financial interest in the issuer;
 
   
the name of each official of the Chinese Communist Party who is a member of the board of the issuer; and
 
   
whether the articles of incorporation of the issuer contains any charter of the Chinese Communist Party.
The Final Amendments also establish procedures that the SEC will follow in identifying issuers and prohibiting trading by certain issuers under the HFCAA.
On December 16, 2021, PCAOB issued the HFCAA Determination Report, according to which, our auditor is subject to the determination that the PCAOB is unable to inspect or investigate it completely. In March 2022, the SEC issued its first “Conclusive list of issuers identified under the HFCAA” indicating that those companies are now formally subject to the delisting provisions if they remain on the list for three consecutive years. Accordingly, we expect to be identified as a “Commission Identified Issuer” shortly after the filing of this annual report on Form
20-F.
Under the current law, delisting and prohibition from
over-the-counter
trading in the U.S. could begin to take place in 2024, at the earliest. In such circumstance, there is no certainty that we will be able to list our ADSs or shares on a
non-U.S.
exchange or that a market for our shares will develop outside of the U.S in a timely manner, or at all. The actual or threatened delisting of our ADSs may materially and adversely affect the value of your investment.
The HFCAA or other efforts to increase U.S. regulatory access to audit information could cause uncertainty for investors of certain issuers, including us, and the market price of our ADSs could be adversely affected. Additionally, whether the PCAOB will be able to conduct inspections of our auditor before the issuance of our financial statements on Form
20-F
for the year ended December 31, 2023, which is due by April 30, 2024, is subject to substantial uncertainty and depends on a number of factors out of our control. If we are unable to meet the PCAOB inspection requirement in time, or at all, we could be delisted from the Nasdaq Global Select Market and our ADSs will not be permitted for trading in the
over-the-counter
market. This would substantially impair your ability to sell or purchase our ADSs when you wish to do so, and the risk and uncertainty associated with delisting and trading prohibition would have a negative impact on the price of our ADSs. Also, such a delisting or trading prohibition would significantly affect our ability to raise capital on terms acceptable to us, or at all, which would have a material adverse impact on our business, financial condition and prospects.
 
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The potential enactment of the Accelerating Holding Foreign Companies Accountable Act would decrease the number of
non-inspection
years from three years to two years, thus reducing the time period before our ADSs may be delisted or prohibited from
over-the-counter
trading. If this bill were enacted, our ADSs could be delisted from the exchange and prohibited from
over-the-counter
trading in the U.S. in 2023.
On June 22, 2021, the U.S. Senate passed a bill to amend Section 104(i) of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7214(i)), which is known as the Accelerating Holding Foreign Companies Accountable Act. It proposes to prohibit securities of any registrant from being listed on any of the U.S. securities exchanges or traded
over-the-counter
if the auditor of the registrant’s financial statements is not subject to PCAOB inspection for two consecutive years, instead of three consecutive years as currently enacted in the HFCAA. In addition, the same
two-year
amendments was included in the America Competes Act of 2022 passed by the U.S. House of Representatives on February 4, 2022.
There are, however, certain differences between the Accelerating Holding Foreign Companies Accountable Act and the America Competes Act, such as those relating to the U.S. Innovation and Competition Act passed by the Senate in 2021. The U.S. House of Representatives and U.S. Senate will need to align their respective legislation and pass their amended bills before the President can sign these bills into law. It is unclear when the U.S. Senate and U.S. House of Representatives will resolve the foregoing differences in the respective bills currently passed, or when the U.S. President will sign on the bill to make the amendment into law, if at all. However, in the case that the bill becomes the law, it will reduce the time period before our ADSs could be delisted from the exchange and prohibited from
over-the-counter
trading in the U.S. from 2024 to 2023.
Proceedings instituted by the SEC against certain
PRC-based
accounting firms, including our independent registered public accounting firm, could result in financial statements being determined to be out of compliance with the requirements of the Exchange Act.
In December 2012, the SEC brought administrative proceedings against the
PRC-based
affiliates of the Big Four accounting firms, including our independent registered public accounting firm, alleging that they had violated U.S. securities laws by failing to provide audit work papers and other documents related to certain other
PRC-based
companies under investigation by the SEC. On January 22, 2014, an initial administrative law decision was issued, censuring and suspending these accounting firms from practicing before the SEC for a period of six months. The decision was neither final nor legally effective until reviewed and approved by the SEC, and on February 12, 2014, the
PRC-based
accounting firms appealed this decision with the SEC. In February 2015, each of the four
PRC-based
accounting firms agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC. The settlement requires the firms to follow detailed procedures to seek to provide the SEC with access to such firms’ audit documents via the CSRC. If the firms do not follow these procedures or if there is a failure in the process between the SEC and the CSRC, the SEC could impose penalties such as suspensions, or it could restart the administrative proceedings.
On February 6, 2015, each of the four China-based accounting firms agreed to a censure and to paid fines to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC and audit U.S.-listed companies. The settlement required the firms to follow detailed procedures and to seek to provide the SEC with access to Chinese firms’ audit documents via the CSRC. Under the terms of the settlement, the underlying proceeding against the four China-based accounting firms was deemed dismissed with prejudice for four years after entry of the settlement. The four-year mark occurred on February 6, 2019. We cannot predict whether the SEC will further challenge the four China-based accounting firms. In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to be out of compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about the proceedings against these audit firms may cause investor uncertainty regarding
PRC-based,
United States-listed companies and the market price of our ADSs may be adversely affected.
If our independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined to be out of compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of our ordinary shares from the Nasdaq or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.
 
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The approval, filing or other requirements of the China Securities Regulatory Commission or other PRC government authorities may be required under PRC law in connection with our issuance of securities overseas.
The M&A Rules purport to require offshore special purpose vehicles that are controlled by PRC companies or individuals and that have been formed for the purpose of seeking a public listing on an overseas stock exchange through acquisitions of PRC domestic companies or assets to obtain approval from the China Securities Regulatory Commission, or the CSRC, prior to publicly listing their securities on an overseas stock exchange. The interpretation and application of the regulations remain unclear. If the approval from CSRC under the M&A Rules 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 the approval for our future issuance of securities overseas would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies.
Furthermore, the recently issued Opinions on Strictly Cracking Down on Illegal Securities Activities in accordance with the Law emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based companies, and proposed to take effective measures, such as promoting the construction of relevant regulatory systems to deal with the risks and incidents faced by China-based overseas-listed companies. Such opinions further provided that the special provisions of the State Council on overseas offerings and listings by those companies limited by shares will be revised and therefore the duties of domestic industry-competent authorities and regulatory agencies will be clarified.
On December 24, 2021, the CSRC published the draft Administrative Provisions of the State Council on the Overseas Issuance and Listing of Securities by Domestic Companies (Draft for Comments), or the Administrative Provisions, and the draft Measures for the Overseas Issuance and Listing of Securities Record-filings by Domestic Companies (Draft for Comments), or the Draft Measures, for public comments. See “Item 4. Information on the Company—4.B. Business Overview—Regulation—Regulations Relating to M&A and Overseas Listings.” Pursuant to these drafts, PRC domestic companies that directly or indirectly offer or list their securities in an overseas market, including a PRC company limited by shares and an offshore company whose main business operations are in China and that intends to offer shares or be listed in an overseas market based on its onshore equities, assets, incomes, or other similar interests, are required to file with the CSRC within three business days after submitting their listing application documents to the regulator in the place of intended listing. Pursuant to the Draft Measures, as to a China-based company that has been listed in an overseas market, it is also required to file with the CSRC within three business days for its
follow-on
offering of securities in the overseas market after the completion of the issuance. As of the date of this annual report, there is no schedule for the adoptions of such drafts. As it remains unclear whether the formal version to be adopted in the future will have any further material changes, it is uncertain how the measures will be enacted, interpreted or implemented and how they will affect us. We are closely monitoring regulatory developments in China regarding any necessary approvals from or filing with the CSRC, the CAC, or other PRC regulatory authorities required for overseas listings and offerings.
If the CSRC or other relevant PRC regulatory agencies subsequently determine that prior approval and filing is required for any of our future offerings of securities overseas or to maintain the listing status of our ADSs, we cannot guarantee that we will be able to obtain such approval or complete such filing in a timely manner, or at all. The CSRC or other PRC regulatory agencies also may take actions requiring us, or making it advisable for us, not to proceed with such offering or maintain the listing status of our ADSs. If we proceed with any such offering or maintain the listing status of our ADSs without obtaining the CSRC’s approval to the extent it is required, or if we are unable to comply with any new approval requirements which might be adopted for offerings that we have completed prior to the publication of the above-referenced opinions, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in China, limit our ability to pay dividends outside of China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from offerings of securities overseas into China or take other actions that could have a material adverse effect on our business, financial condition, results of operations and prospects, as well as the trading price of the ADSs.
Furthermore, if there are any other approvals, filings and/or other administration procedures, including the cybersecurity review under the Cybersecurity Review Measures and the Draft Measures for Internet Data Security, to be obtained from or completed with the CSRC or other PRC regulatory agencies as required by any new laws and regulations for any of our future proposed offering of securities overseas or the listing of the ADSs, we cannot assure you that we can obtain the required approval or complete the required filings or other regulatory procedures in a timely manner, or at all. Any failure to obtain the relevant approvals or complete the filings and other relevant regulatory procedures may subject us to regulatory actions or other sanctions from the CSRC or other PRC government authorities, which may have a material adverse effect on our business, financial condition or results of operations.
Risks Related to Our Business and Industry
If we fail to retain our existing users, keep them engaged or further grow our user base, our business, operation, profitability and prospects may be materially and adversely affected.
 
24

The size of our user base and the level of our user engagement are critical to our success. Our main monetization strategies—livestreaming, advertisement and others depend on our ability to maintain and increase the size of our user base and user engagement level. If our user base becomes smaller or our users become less active, it is probable that they would spend less on our virtual gifts and jointly operated games or visit our advertisements less frequently, or access our platform less in general. This would in turn drive top streamers away from our platform, discourage companies from purchasing advertisements on our platform and dissuade game developers and publishers from distributing their games through our platform. Our financial condition would suffer from the consequential decline in revenue and our business and operating results would be materially and adversely impacted.
We are one of China’s leading game-centric livestreaming platforms in terms of the size of our user base and the level of user engagement. Maintaining and improving the current size of user base and level of user engagement are critical to our continued success. However, to maintain and improve this already large size of user base and high level of user engagement, we would have to ensure that we adequately and timely respond to changes in user preferences, attract and retain enough popular streamers, and offer new features and content that may attract new users. There is no guarantee that we could meet all of these goals. A number of factors could negatively affect user retention, growth and engagement, including the following:
 
   
we are unable to combat spam on or inappropriate or abusive use of our platform, which may lead to negative public perception of us and our brand;
 
   
technical or other problems prevent us from delivering our services in a rapid and reliable manner or otherwise adversely affect the user experience;
 
   
we fail to innovate our communities, user-generated content and our virtual gifts that keep our users interested and eager to return to our platform on a regular basis;
 
   
our streamers fail to keep our users engaged on our platform over a long period of time;
 
   
we suffer from negative publicity, fail to maintain our brand or our reputation is damaged;
 
   
we fail to address user concerns related to privacy and communication, safety, security or other factors;
 
   
there are adverse changes in our services that are mandated, or that we elect to make, to address, legislation, regulations or government policies; and
 
   
the growth of the number of PC and smartphone users in China stalls.
We may fail to attract, cultivate and retain top streamers, which may materially and negatively affect our user retention and thus our business and operations.
Our registered streamers include a high number of top streamers each of whom entered into an exclusive contract with us directly. Our top streamers tend to have large fan bases following them who regularly support these streamers with virtual gifts, and they also tend to attract many integrated promotion activities during livestreaming compared to self-registered streamers. Their charisma and the high-quality content that they create are primary contributors to user stickiness and are hard to replicate with self-registered streamers.
Although we have signed exclusive contracts with top streamers at typically three- to five-year terms that contain
non-compete
clauses, top streamers may still choose to depart from us when their contract period ends, and their departure may cause a corresponding decline in our user base. As we attract top streamers from other platforms, we have also been and are currently involved in legal disputes concerning top streamers with competing platforms. Although we are not the primary target of these legal disputes, such streamers may be subject to fines or even injunctions which may render our investment in recruiting them meaningless. On the other hand, some of our top streamers have left us for competing platforms despite still being in a contractual relationship with us which may raise legal disputes. Although we have won some of the legal disputes against these breaching streamers, their departures may still have a negative impact on user retention and reputation. To retain top streamers, we must devise better streamer compensation schemes, improve our monetization capabilities and help the top streamers reach a wider audience. Although we strive to improve ourselves in these aspects, we cannot guarantee that our streamers will not leave us even if we do our best to retain them.
In terms of streamer cultivation, we cannot guarantee that the performance metrics we use to track promising streamers will enable us to identify future top streamers. Some of the streamers we identify as promising may turn out to be underperforming, and we may also fail to spot truly promising streamers in early stages of their careers. In addition to a waste of resources, either one of these scenarios could prevent us from cultivating top streamers, which could weaken our core competitive strength against competing platforms and thus cause an outflow of users to those platforms.
We may fail to offer attractive content, in particular popular game content, on our platform.
 
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We offer comprehensive livestreaming content with a primary focus on games. Our content library is constantly evolving and growing. Game content has been the key component of our content offerings since our inception. A majority of our streamers were game streamers and game streaming also contributed significantly to the total viewing hours on our platform. In response to viewers’ growing interests, we also have expanded our coverage into other entertainment content genres. We actively track viewership growth and community feedback to identify trending content and encourage our streamers and talent agencies to create content that caters to viewers constantly changing tastes. However, if we fail to expand and diversify our content offerings, identify trending and popular genres, or maintain the quality of our content, we may experience decreased viewership and user engagement, which may materially and adversely affect our results of operations and financial conditions.
In addition, we largely rely on our streamers to create high-quality and fun livestreaming content. We have in place a comprehensive and effective incentive mechanism to encourage streamers and talent agencies to supply content that is attractive to our viewers. Also, talent agencies cooperating with us may guide or influence streamers to livestream content that is well received by our viewers. However, if we fail to observe the latest trends and timely guide streamers and talent agencies accordingly, or fail to attract streamers who are capable of creating content based on popular games, or if streamers fail to produce content for trending games, our viewer numbers may decline and our financial condition and results of operations may be materially and adversely affected.
We have significant reliance on the eSports industry.
As the nexus of the eSports ecosystem, our platform connects game developers and publishers, professional eSports teams or players and eSports tournament organizers, advertisers and viewers. User generated content covering eSports games is the largest contributor to our user base. Our average mobile eSports MAUs were approximately 34.0 million and 37.1 million in the fourth quarter of 2020 and 2021, respectively. In addition to streaming of eSports games, major eSports events and tournaments, we also sponsor leading eSports teams and organize our own eSports tournaments.
We rely heavily on a number of eSports games to generate our user traffic. For example, the most popular eSports games on our platform attracted a large amount of average mobile MAUs and generated significant hours spent by our users. As a result, if we fail to maintain our market position in the eSports industry or to attract users through livestreaming of popular eSports games, if the game developers and publishers fail to maintain the normal publication and operation of their online games or if any of these games fails to attract enough users, our user base and streamer base may shrink significantly. We may experience decreased viewership and user engagement, which may materially and adversely affect our results of operations and financial condition.
If we fail to effectively manage our growth and control our periodic spending to maintain such growth, our brand, business and results of operations may be materially and adversely affected.
We have experienced a period of significant growth and expansion in the past, which placed significant strain on our management and resources. However, given our limited operating history and the rapidly evolving market in which we compete, we may encounter difficulties as we establish and expand our operations, research and development, sales and marketing, and general and administrative capabilities. We cannot assure you that this level of growth will be sustainable or achieved at all in the future. We believe that our continued growth will depend on our ability to attract and retain viewers and top streamers, develop an infrastructure to service and support an expanding body of viewers and streamers, explore new monetization avenues, convert
non-paying
users to paying users, increase user engagement levels and capitalize on the eSports industry. We cannot assure you that we will be successful with any of the above.
To manage our growth and maintain profitability, we expect our costs and expenses to continue to increase in the future as we anticipate that we will need to continue to implement, from time to time, a variety of new and upgraded operational, informational and financial systems, procedures and controls on an
as-needed
basis, including the continued improvement of our accounting and other internal management systems. We will also need to expand, train, manage and motivate our workforce and manage our relationships with viewers and streamers, game developers and publishers, advertisers and other business partners. All of these endeavors involve risks and will require substantial management efforts and skills and significant additional expenditures. We expect to continue to invest in our infrastructure in order to enable us to provide our services rapidly and reliably to viewers and streamers. Continued growth could end up straining our ability to maintain reliable service levels for all of our viewers and streamers, develop and improve our operational, financial, legal and management controls, and enhance our reporting systems and procedures. Managing our growth will require significant expenditures and the allocation of valuable management resources. If we fail to achieve the necessary level of efficiency in our organization as we grow, our business, operating results and financial condition could be harmed.
 
26

We have incurred net losses since inception, and we may continue to incur losses in the future.
We have incurred significant accumulated net losses to date. Although experiencing net incomes since 2019, we may not generate sufficient revenues to offset such costs to achieve or sustain profitability in the future. We generated net incomes in 2020 but incurred net losses in 2021. We have generated gross profit since 2018, and this may not translate into continued net
after-tax
profit. The time it will take for us to eventually achieve profitability hinges on our ability to grow rapidly in a cost-effective way, and we may not be able to grow this way successfully.
While our future revenue growth will be linked with the realization of our monetization strategies, which will be affected by user engagement, streamer retention and product offering, our cost-effective growth will primarily rely on improvement of operational efficiency. We may not be able to improve our operational efficiency in the future, or our operational efficiency improvement may not reach a sufficient level to generate profitability. Our ability to continue to improve operational efficiency will depend on our ability to maintain stronger bargaining positions in contract negotiations with top streamers, streamline our operation, achieve economies of scale and employ more advanced streaming technologies at lower cost, among other things. Additionally, our ability to achieve profitability is affected by various external factors, many of which are beyond our control, such as the PC and mobile games market and eSports industry in China, and the development of social networking, livestreaming services and mobile marketing services. We cannot assure you that we will be able to improve our operational efficiency in the future.
We may again incur losses in the near future due to our continued investment in services, technologies, overseas expansion, research and development and our continued sales and marketing initiatives. Changes in the macroeconomic and regulatory environment or competitive dynamics and our inability to respond to these changes in a timely and effective manner may also impact our profitability. Accordingly, we cannot assure you that our company will turn profitable in the short term just because we have made substantial investments in various areas.
Our business may suffer if we fail to successfully implement our monetization strategies.
Our monetization model is new and evolving. Our streaming platform is free to access, and we generate revenues primarily from livestreaming and advertisement. As a result, our revenue is affected by our ability to increase user engagement and convert
non-paying
users into paying users, which in turn depends on our ability to offer content, virtual gifts, advertisements and other services. In 2019, 2020 and 2021, we generated RMB6,617.3 million, RMB8,852.2 million and RMB8,596.6 million (US$1,349.0 million) from livestreaming, representing 90.9%, 92.2% and 93.8% of our total revenues for the same period. We also generate a sizeable portion of our revenues from providing advertisement and other services on our platform. In 2019, 2020 and 2021, we generated RMB665.9 million, RMB749.7 million and RMB568.7 million (US$89.2 million) from advertisements and others, representing 9.1%, 7.8% and 6.2% of our total revenues for the same period. We also generate a small portion of our revenue from game distribution, which involves revenue-sharing arrangements with game developers and publishers. If we are not successful in enhancing our ability to monetize our existing services or developing new approaches to monetization, we may not be able to maintain or increase our revenues and profits or recover any associated costs. We monitor market developments and may adjust our monetization strategies accordingly from time to time, which may result in decreases of our overall revenue or revenue contributions from some monetization channels. In addition, we may in the future introduce new services to diversify our revenue streams, including services with which we have little or no prior development or operating experience. If these new or enhanced services fail to engage customers or platform partners, we may fail to generate sufficient revenues to justify our investments, and our business and operating results may suffer as a result.
Our content monitoring system may not be effective in preventing misconduct by our platform users and misuse of our platform and such misconduct or misuse may materially and adversely impact our brand image, business and operating results.
We are a game-centric livestreaming platform that provides real-time streaming and interactions. Because we do not have full control over how streamers or viewers will use our platform to communicate, our platform may be misused by individuals or groups of individuals to engage in immoral, disrespectful, fraudulent or illegal activities. For example, we must detect spam accounts, through which illegal or inappropriate content is streamed or posted and illegal or fraudulent activities are conducted, on a timely basis. Media reports and Internet forums have covered some of these incidents which have, in some cases, generated negative publicity about our platform and brand. We have implemented control procedures to detect and block illegal or inappropriate content and illegal or fraudulent activities conducted through the misuse of our platform, but such procedures may not prevent all such content from being broadcasted or posted or activities from being carried out. Moreover, as we have limited control over real-time and offline behavior of our users, to the extent such behavior is associated with our platform, our ability to protect our brand image and reputation may be limited. Our business and the public perception of our brand may be materially and adversely affected by misuse of our platform.
 
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In addition, if any of our viewers suffers or alleges to have suffered physical, financial or emotional harm following contact initiated on our platform or after watching illegal or inappropriate content that our content monitoring system failed to filter out, we may face civil lawsuits or other liabilities initiated by the affected viewer, or governmental or regulatory actions against us. In response to allegations of illegal or inappropriate activities conducted through our platform or any negative media coverage about us, PRC government authorities may intervene and hold us liable for noncompliance with PRC laws and regulations concerning the dissemination of information on the Internet and subject us to administrative penalties or other sanctions, such as requiring us to restrict or discontinue some of the features and services provided on our website and mobile application, or even revoke our licenses or permits to provide Internet content service. We endeavor to ensure that all streamers are in compliance with relevant regulations, but we cannot guarantee that all streamers will comply with all the PRC laws and regulations in all aspects. Therefore, our livestreaming service may be subject to investigations or subsequent penalties if content displayed on our platform is deemed to be illegal or inappropriate under PRC laws and regulations. Especially, if our top streamers violate the policy of our platform to conduct any illegal or inappropriate behavior on our platform or in private, we may be required to block the account of such top streamers. As a result, our business may suffer and our user base, revenues and profitability may be materially and adversely affected.
Our limited operating history with a relatively new business model in a relatively new market makes it difficult to evaluate our business and growth prospects.
Our business operations commenced in 2014, with commercialization beginning midway through 2015. We have experienced year-over-year growth in the number of active and paying users and total revenue since 2016. However, our growth in the past may not be indicative of our future performance, as our operating results represent a
limited-size
sample of operational results and may be hard to repeat in the future.
Many of the elements of our business are unique and evolving. The markets for our livestreaming platform and the related products and services are relatively new and rapidly developing and are subject to significant challenges, especially in terms of converting
non-paying
users to paying users, maintaining a stable paying user base and attracting new paying users. Our business plan relies heavily upon an expanding user base and the resulting increased revenue from livestreaming and advertisement, as well as our ability to capitalize on the eSports industry and explore other monetization avenues. We may not succeed in any of these aspects.
As the livestreaming industry in China is relatively young, there are few proven methods of projecting user demand or available industry standards on which we can rely. Some of our current monetization methods are also in a relatively preliminary stage. For example, if we fail to properly manage the volume and price of our virtual gifts, our users may be less likely to purchase them. We cannot assure you that our attempts to monetize our viewers and streamers will continue to be successful, profitable or accepted, and therefore the income potential of our business is difficult to gauge.
Our growth prospects should be considered in light of the risks and uncertainties that fast-growing early-stage companies with limited operating histories in evolving industries may encounter, including, among others, risks and uncertainties regarding our ability to:
 
   
develop new virtual gifts that are appealing to users;
 
   
develop new advertisement formats that are appealing to advertising partners;
 
   
maintain stable relationships with game developers and publishers; and
 
   
expand to new geographic markets with good eSports environment and high growth potential.
Addressing these risks and uncertainties will require significant capital expenditures and allocation of valuable management and employee resources. If we fail to successfully address any of the above risks and uncertainties, the size of our user base, our revenue and operating margin may decline.
We face risks related to natural disasters, health epidemics and other outbreaks of contagious diseases.
Our business could be adversely affected by natural disasters or outbreaks of epidemics. These natural disasters, outbreaks of contagious diseases, and other adverse public health developments in China or any other market in which we operate and conduct business could severely disrupt our business operations by damaging our network infrastructure or information technology system or affecting the productivity of our workforce. The outbreak of any severe epidemic disease, such as avian flu, H1N1 flu, SARS or coronavirus, may disrupt our operations, which could negatively affect our financial condition and business prospects.
COVID-19
has and is continuing to spread worldwide. The epidemic has resulted in mandatory quarantines, travel restrictions, and the temporary closure of stores and facilities in certain parts of the world. In March 2020, the World Health Organization declared the
COVID-19
a pandemic.
 
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In response to efforts to contain the spread of
COVID-19,
we or our business partners may need to implement adjustments to work schedules to allow workers to work remotely from home, quarantine our employees or our offices, or impose temporary office closure and travel restrictions, which may result in lower work efficiency and/or productivity. There might be travel restrictions imposed by various government authorities that could prevent our employees from travelling. These emergency measures have been significantly relaxed in China as of the date of this annual report. However, there have been occasional outbreaks of
COVID-19
in various cities in China, and the Chinese government may again take measures to keep
COVID-19
in check. Our user acquisition and engagement may fluctuate depending on factors beyond our control, such as the
shelter-in-place
restrictions due to the
COVID-19
pandemic. In addition, our users may have less disposable income and the industry in which we operate may experience a general decline. We may also experience negative impacts on our advertisement revenue or other revenue, and our suppliers may not be able to deliver our orders in time. Although the Chinese economy has been gradually recovering since then, if the impact of
COVID-19
is prolonged or worsens further, it may still adversely affect our revenue and financial conditions. The global stock markets have experienced, and may continue to experience, significant decline or even trade suspension due to the
COVID-19
outbreak, which may result in a negative impact on our company, our overseas business and also a decline of value in the companies we invested in. While the outbreak of
COVID-19
has come under control in the PRC since the second quarter of 2020, there was a significant rise in
COVID-19
cases, including the
COVID-19
Delta and Omicron variant cases, in various cities in China in early 2022. The local governments of the affected cities have reinstated certain COVID-related measures, including travel restrictions and
stay-at-home
orders.
The extent to which the
COVID-19
outbreak might impact our results will depend on future developments, which are highly uncertain and cannot be predicted, including but not limited to new information on the effectiveness of the mitigation strategies, the duration, spread, severity and recurrence of
COVID-19
and any
COVID-19
variants and related travel advisories and restrictions, and the efficacy of
Covid-19
vaccines, which may also take extended time to be widely and adequately distributed. We may need to adjust our forecast downward or record impairment of the fair value of our investments should the situation continue to worsen.
In our market, we mainly compete with other established streaming platforms and other entertainment mediums. If we are unable to compete effectively, our business and operating results may be materially and adversely affected.
Since running a successful livestreaming platform requires intensive capital outlay and a large team of quality streamers, who remain in short supply due to the fact that most have signed contracts with existing platforms, there are high entry barriers for our industry. As a result, our major competitors are streaming platforms with an established presence in the industry, as well as other short or medium video platforms, social media platforms and other online entertainment platforms. While such competition may only come from a few established players instead of many newcomers, competition remains intense. As it is unlikely that viewers will watch streams on two platforms at once, and most top streamers sign exclusive contracts with only one platform, we compete mainly for user traffic and top streamers. If we are not able to effectively compete with other platforms, our overall user base and level of user engagement may decrease, which may result in loss of top streamers to other platforms. Such loss may also lead to fewer paying users and make us less attractive to advertisers and game developers and publishers, which may adversely affect our monetization success.
To better compete with other platforms which may have more cash, traffic, technological advantages, top streamers, business networks and other resources than we do, we may be required to spend additional resources, which may adversely affect our profitability. Furthermore, if we are involved in disputes with any of our competitors that result in negative publicity for us, such disputes, regardless of their veracity or outcome, may harm our reputation or brand image and in turn lead to reduced numbers of viewers and streamers. Our competitors may unilaterally decide to adopt a wide range of measures targeted at us, including approaching our top streamers, purchasing exclusive streaming rights to eSports tournaments or events that used to be streamed on our platform, or even attacking our platform. Any legal proceedings or measures we take in response to competition and disputes with our competitors may be expensive, time-consuming and disruptive to our operations and divert our management’s attention.
We believe that our ability to compete effectively depends upon many factors both within and beyond our control, including:
 
   
the popularity, usefulness, ease of use, performance and reliability of our services compared to those of our competitors, and our research and development abilities relative to our competitors;
 
   
changes mandated, or that we elect to make, to address, legislation, regulations or government policies, some of which may have a disproportionate effect on us;
 
   
acquisitions or consolidation within our industry, which may result in more formidable competitors; and
 
   
our reputation and brand strength relative to our competitors.
In addition, our users have a vast array of entertainment choices. Other forms of entertainment, such as other online video services including video platforms, social networking, traditional PC and console games, as well as more traditional mediums such as television, movies and sports spectating, are much more well-established in mature markets and may be perceived by our users to offer greater variety, affordability, interactivity and enjoyment. Our platform competes against these other forms of entertainment for the discretionary time and spending of our users. If we are unable to sustain sufficient interest in our platform in comparison to other forms of entertainment, including new forms of entertainment that may emerge in the future, our business model may no longer be viable.
 
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Our revenue growth is heavily dependent on paying users and revenue per paying user. If we fail to continue to grow or maintain our paying users and continue to increase revenue per paying user, our livestreaming revenue may not increase, which may materially and adversely affect our business operation and financial results.
Our annual paying user base was 20.7 million in 2020 and 17.5 million in 2021. Whether we can increase the number of our paying users depends on many factors, and many of them are out of our control. For example, our paying users may have less disposable income as they need to meet financial obligations elsewhere, they may decide to no longer support a particular streamer that they used to follow financially, and overall worsening economic conditions can lower disposable income for all existing paying users, causing them to spend less on our platform. We expect that our business will continue to be heavily dependent on revenue collected from paying users in the near future.
We have significant reliance on revenues from virtual gift sales. Any limitation imposed by PRC authorities on the sale, exchange or circulation of virtual gifts in the future may reduce the virtual gift payments our users make to streamers, which is critical to our business and results of operations. In November 2020, National Radio and Television Administration, or the NRTA, promulgated the Notice on Strengthening the Management of Online Show Livestreaming and
E-commerce
Livestreaming, or Notice 78, which requires the livestreaming platform to set a limit on the maximum amount of virtual gifting per time, per day, and per month. On February 9, 2021, the CAC, the National Office of Anti-Pornography and Illegal Publication, the MIIT, the Ministry of Public Security, the Ministry of Culture and Tourism, the SAMR, and the NRTA jointly issued the Guidance Opinions on the Strengthening the Regulation and Management Work of Internet Streaming, or the 2021 Streaming Guidance Opinions. Pursuant to the 2021 Streaming Guidance Opinions, Internet streaming platforms should set up appropriate caps on the maximum purchase price for each piece of virtual gift and maximum value of virtual gifts that the users may give to the streamers each time, and should notify the users who reach the daily cap of giving virtual gifts. Internet streaming platforms are further required, if necessary, to set up a
cooling-off
period and a delayed-fund-transfer system for giving virtual gifts, and are required to implement a tiered and classified management system over the streamers in which different maximum values of a virtual gift to be received by streamers in one streaming session shall be established differently in accordance with the tiers and classes that the streamers belong to. Notice 78 and the 2021 Streaming Guidance Opinions are silent on the specific amount of such caps. As the Notice 78 and the 2021 Streaming Guidance Opinions are relatively new and pending further interpretation and implementation, we are still in the process of waiting for further guidance from regulatory authorities and evaluating the applicability and effect of the various requirements under Notice 78 and the 2021 Streaming Guidance Opinions. Stricter limitations on giving virtual gifts may restrict our users’ ability to give virtual gifts to streamers, and result in decline in the number of paying users, so our results of financials and operations may be materially and adversely affected. See “—Our business may suffer if we fail to successfully implement our monetization strategies.”
We generate a portion of our revenues from advertisement. If we fail to maintain or grow advertisement revenue, our financial results may be adversely affected.
In 2019, 2020 and 2021, we generated RMB513.3 million, RMB645.2 million and RMB464.9 million (US$72.9 million) from the sale of advertisements, representing 7.0%, 6.7% and 5.1% of our total revenues for the same period. Our revenues from advertisement represent an important part of our total revenue, and our financial results could be adversely affected if we fail to maintain or grow it in the future. For us to maintain or grow our advertisement revenue, we need to attract more advertisers to our platforms with our increased user traffic and engagement level, or offer more variety in terms of advertisement products that encourage more spending from advertisers. We offer (i) integrated promotion activities during livestreaming, (ii) advertisement display and (iii) online and offline events-related advertisements. We may need to introduce more innovative promotion activities to maintain our revenues from advertisement, and failure to do so may adversely impact our advertisement revenue. In addition, traditional display advertisements are subject to time and space restrictions, especially when displayed on mobile devices which have become popular among our users. As a result, our business and results of operations may be adversely impacted.
Advertisement revenue is also affected by the online advertising industry in China and advertisers’ allocation of budgets to internet advertising and promotion. Companies that decide to advertise or promote online may utilize more established methods or channels for online advertising and promotion, such as more established Chinese internet portals or search engines, over advertising and promotion on our platforms. If the online advertising market size does not increase from current levels, or if we are unable to capture and retain a sufficient share of that market, our ability to maintain or increase our current level of advertisement revenue and our profitability and prospects could be adversely affected.
If we fail to obtain or maintain the required licenses and approvals or if we fail to comply with laws and regulations applicable to our industry, our business, financial condition and results of operations may be materially and adversely affected.
The internet industry in China is highly regulated, which requires certain licenses, permits, filings and approvals to conduct and develop business. Currently, we have obtained the following valid licenses through our PRC variable interest entities: Value-added Telecommunication Business License for provision of internet information services, or the ICP License, Internet Culture Operation License for operating online culture products, Commercial Performance License for providing streamer agency services, License for Online Transmission of Audio/Video Programs for providing online streaming of video and Radio and Television Program Production and Operating Permit for producing radio and television programs.
 
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Due to the uncertainties of interpretation and implementation of existing and future laws and regulations, the licenses we held may be deemed insufficient by governmental authorities, which may restrain our ability to expand our business scope and may subject us to fines or other regulatory actions by relevant regulators if our practice is deemed as violating relevant laws and regulations. As we develop and expand our business scope, we may need to obtain additional qualifications, permits, approvals or licenses. Moreover, we may be required to obtain additional licenses or approvals if the PRC government adopts more stringent policies or regulations for our industry.
For example, according to the Administrative Provisions for Audio/Video Programs Services through Internet, or the Audio/Video Measures, which was promulgated by the State Administration for Radio, Film and Television, or the SARFT (currently known as the National Radio and Television Administration), which came into effect on January 31, 2008, and was amended on August 28, 2015, to engage in the business of transmitting audio/video programs, a License for Online Transmission of Audio/Video Programs is required. We have obtained the License for Online Transmission of Audio/Video Programs for offering live video programs on our platforms. Further, the License for Online Transmission of Audio/Video Programs is subject to periodical renewal. Although we have successfully renewed it in the past, there is no guarantee that we will be able to continue to do so in the future. We may not be able to continue to hold the License for Online Transmission of Audio/Video Programs. The scope specified in our License for Online Transmission of Audio/Video Programs may not be able to cover all the needs that arise or will arise in our operations from time to time, and we may not be able to expand the scope of our License for Online Transmission of Audio/Video Programs under the current regulatory regime as we are not a wholly state-owned or state-controlled entity as required for holding such license under PRC laws. Failure to expand the scope of our current License for Online Transmission of Audio/Video Programs or to continue to hold such license may result in fines or other penalties being imposed on us, which may adversely affect our business. Furthermore, we may also be required to complete filing with the National Information Registration Administration System of Online Audio/Video Platforms for offering live video programs on our platforms. We may not be able to complete such filing in a timely manner, or at all. In addition, for the purpose of providing internet audio/video program service, we have adopted and will adopt various operating strategies and measures. Due to the uncertainties of interpretation and application of pertinent laws by the government authority, such strategies and measures may be challenged under PRC laws and regulations and if so, we may be subject to fines,
confiscation-of-income
related or other penalties and, in certain circumstances, suspension or revocation of the license, which may materially and adversely affect our business.
In addition, publishing and the commercial launch of domestic online games is subject to the
pre-approval
by the National Press and Publication Administration, or the NPPA. The NPPA suspended such permission from March to December 2018 and has since restored it. Such suspension caused significant delays in the approval of the online games in the Chinese market. As a result, game publishers may not be able to obtain approval or make timely filings with the NPPA for their online games or at all. In December 2019, the Department of Law Enforcement of the Ministry of Culture and Tourism further published a circular reiterating that online games streamed or operated by livestreaming platforms shall also obtain requisite
pre-approvals
from the NPPA. In March 2021, the National Municipal Office of Anti-Pornography and Illegal Publication and the NPPA jointly launched the “New Trend 2021” campaign , reiterating that a livestreaming platform shall not stream online games which have not obtained the approval from the NPPA. The “Cleaning Up the Internet” campaigns launched by the relevant authorities have also inspected and imposed penalties in connection with livestreaming of
non-approved
online games. On April 12, 2022, the Online Audio-visual Program Management Department of NRTA and the Publishing Bureau of the Central Propaganda Department issued the Notice on Strengthening the Management of Livestreaming of Online Games on the Online Audio-visual Program Platforms, which reiterates that online audio-visual program platforms, including live streaming platforms are prohibited from disseminating illegal games on audio-visual program platforms, streaming online games that have not been approved by the competent authorities and using livestreaming rooms and other forms to drive traffic for the illegal game content on various platforms. Although the game publishers are responsible for obtaining the required approvals, filings or permits for these online games streamed or operated on our platform, we may still be subject to fines, confiscation of income from these games, suspension of operations, revocation of licenses and other penalties due to game publishers’ failure to obtain such approvals, filings or permits, which could materially and adversely affect our business and results of operations. Given our significant reliance on eSports content, if game publishers and operators fail to maintain the normal publication and operation of their online games, or fail to complete or obtain the necessary approvals and filings of their online games, or if more stringent regulations are adopted or the government authority takes more strict regulation or action against the online games industry or livestreaming industry in the future, our business, operation and financial condition will be adversely impacted.
As the internet industry in China is still at a relatively early stage of development, new laws and regulations may be adopted from time to time to address new issues that come to the authorities’ attention. Considerable uncertainties still exist with respect to the interpretation and implementation of existing and future laws and regulations governing our business activities. We could be found in violation of any future laws and regulations or any of the laws or regulations currently in effect due to changes in the relevant authorities’ interpretation of these laws and regulations. See “—We may be materially and adversely affected by the complexity, uncertainties and changes in PRC regulation of the Internet industry and companies.”
 
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As of the date of this annual report, we have not received any material penalties from the relevant government authorities for our past operations. We cannot assure you, however, that the government authorities will not do so in the future. In addition, we may be required to obtain additional license or permits, and we cannot assure you that we will be able to timely obtain or maintain all the required licenses or permits or make all the necessary filings in the future. If we fail to obtain, hold or maintain any of the required licenses or permits or make the necessary filings on time or at all, we may be subject to various penalties, such as confiscation of the net revenues that were generated through the unlicensed activities, the imposition of fines and the discontinuation or restriction of our operations. Any such penalties may disrupt our operations and materially and adversely affect our business, financial condition and results of operations.
We may be subject to intellectual property infringement claims or other allegations by third parties for information or content displayed on, retrieved from or linked to our platform, or distributed to our users, or for proprietary information appropriated by former employees, which may materially and adversely affect our business, financial condition and prospects.
We have been and may, in the future, be subject to intellectual property infringement claims or other allegations by third parties for services we provide or for information or content displayed on, retrieved from or linked to, recorded, stored or made accessible on our platform, or otherwise distributed to our users, including in connection with the music, movies, video and games played, recorded, stored or made accessible on our platform, which may materially and adversely affect our business, financial condition and prospects.
Under our agreements with top streamers, we obtain the license for the intellectual property arising from their livestreaming on our platform. We have implemented internal control measures to ensure that the design of our platform and the content that is streamed on it does not infringe on valid intellectual property, such as patents and copyrights held by third parties. We also license certain intellectual properties from third parties to implement certain functions available on our platform.
However, companies in the internet, technology and media industries are frequently involved in litigation based on allegations of infringement of intellectual property rights, unfair competition, invasion of privacy, defamation and other violations of other parties’ rights. In China, the validity, enforceability and scope of protection of intellectual property rights in internet-related industries, especially in our evolving livestreaming industry, are uncertain and still evolving. We face, from time to time, and expect to face in the future, allegations that we have featured pirated or illegally downloaded music and movies on our platform, and that we have infringed on the trademarks, copyrights, patents and other intellectual property rights of third parties, including our competitors, or allegations that we are involved in unfair trade practices. Some of the game streaming on our platform may be alleged to infringe on the copyright on works of literature and art of a game of the game producers, which may also constitute an unfair competition claim. As we face increasing competition and as litigation becomes a more common method for resolving commercial disputes in China, we face a higher risk of being the subject of intellectual property infringement claims or other legal proceedings.
We allow streamers to upload text, graphics, audio, video and other content to our platform and users to download, share, link to and otherwise access games and other content on our platform and we also upload high-quality video clips recorded and restored from selective livestreaming content. Under applicable PRC laws and regulations, online service providers, which provide storage space for users to upload works or links to other services or content, could be held liable for copyright infringement under various circumstances, including situations where the online service provider knows or should reasonably have known that the relevant content uploaded or linked to on its platform infringes upon the copyright of others and the online service provider failed to take necessary actions to prevent such infringement. We have procedures implemented to reduce the likelihood that content might be used without proper licenses or third-party consents. However, these procedures may not be effective in preventing the unauthorized posting or distribution of copyrighted content and we may be considered as failing to take necessary actions against such infringement. Therefore, we may face liability for copyright or trademark infringement, defamation, unfair competition, libel, negligence and other claims based on the nature and content of the materials that are delivered, shared or otherwise accessed through our platform.
Certain of our employees were previously employed at other peer companies, including our current and potential competitors. To the extent that these employees are involved in the development of content or technology similar to ours at their former employers, we may become subject to claims that such employees, or we, may have appropriated proprietary information or intellectual properties of the former employers of our employees. If we fail to successfully defend such claims, our results of operations may be materially and adversely affected.
Defending claims is costly and can impose a significant burden on our management and employees, and there can be no assurances that favorable final outcomes will be obtained in all cases. Such claims, even if they do not result in liability, may harm our reputation. Any resulting liability or expenses, or changes required to our platform to reduce the risk of future liability, may have a material adverse effect on our business, financial condition and prospects.
 
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We may be held liable for information or content displayed on, retrieved from or linked to our platform, or distributed to our users if such content is deemed to violate any PRC laws or regulations, and PRC authorities may impose legal sanctions on us.
We are a livestreaming platform that enables our users to exchange information, generate content, advertise products and services, and engage in various other online activities. Although real-name registration is required for streamers by our platform, we may not be able to verify the identity information provided by our streamers as true and accurate. For registration of users, we verify identities primarily based on verification text messages sent to their mobile devices, which may not always be reliable. As a majority of the video and audio communications on our platform is conducted in real time, we cannot filter the content generated by our streamers and users on air before they are streamed on our platform. Therefore, users may solicit or engage in illegal conversations or activities, including publishing inappropriate or illegal content on our platforms that may be prohibited under PRC laws and regulations. See “—Our content monitoring system may not be effective in preventing misconduct by our platform users and misuse of our platform, and such misconduct or misuse may materially and adversely impact our brand image, business and operating results.”
We require users to agree to our terms of service upon account registration. Our terms of service set out types of content strictly prohibited on our platform, and we have also developed a robust content monitoring system. However, although we use our best efforts to monitor content on our platform, we cannot detect every incident of inappropriate content on our platform due to the immense quantity of user-generated content, and as such, government authorities may hold us liable for inappropriate content on our platform. Although we report violations of our terms of service to PRC local authorities, such authorities may not take any action with respect to these violations on a timely basis, if at all. On December 15, 2019, the CAC promulgated the Provisions on the Ecological Governance of Network Information Contents, which became effective on March 1, 2020. It requires network platform operators like us not to disseminate illegal contents that, among other things, violates PRC laws and regulations, impairs the national dignity of China or the public interest, nor to present obscure, superstitious, fraudulent, gambling, violent, defamatory, exaggerated, sexually suggestive, discriminative or other inappropriate contents that are “socially destabilizing” or leaking “state secrets” of China. Notice 78 also requests the livestreaming platforms to strengthen positive value guidance and to prevent the spread of the information related to wealth flaunting, money worshiping and vulgarity. We may be subject to fines or other disciplinary actions, including, in serious cases, suspension or revocation of the licenses necessary to operate our platform if we are deemed to have facilitated the appearance of inappropriate content placed by third parties on our platform under PRC laws and regulations. In addition, application stores may temporarily take down our applications if the content was deemed to violate applicable PRC laws or regulations. Meanwhile, we may face claims for defamation, libel, negligence, copyright, patent or trademark infringement, other unlawful activities or other theories and claims based on the nature and content of the information delivered on or otherwise accessed through our platform. Defending any such actions could be costly and require significant time and attention of our management and other resources, which would materially and adversely affect our business.
We may be materially and adversely affected by the complexity, uncertainties and changes in PRC regulation of the Internet industry and companies.
The PRC government extensively regulates the Internet industry, including foreign ownership of, and the licensing and permit requirements pertaining to, companies in the Internet industry. These Internet-related laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainties, so we may be subject to the interpretations made in policies and guidelines of regulators. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be in violation of applicable laws and regulations. Issues, risks and uncertainties relating to PRC regulation of the Internet business include, but are not limited to, the following:
 
   
There are uncertainties relating to the regulation of the Internet business in China, including evolving licensing practices. Permits, licenses or operations at some of our subsidiaries and PRC variable interest entity levels may be subject to challenge. We may not be able to timely obtain or maintain all the required licenses or approvals, permits, or to complete filing, registration or other formalities necessary for our present or future operations, and we may not be able to renew certain permits or licenses or renew certain filing or registration or other formalities. See “—If we fail to obtain or maintain the required licenses and approvals or if we fail to comply with laws and regulations applicable to our industry, our business, financial condition and results of operations may be materially and adversely affected” and “Regulation and “Item 4. Information of the Company—4.B. Business Overview—Regulation.”
 
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PRC governmental authorities may impose additional requirements on real-name registration for livestreaming platforms. In August 2018, the National Office of Anti-Pornography and Illegal Publication and five other authorities jointly issued the Notice on Strengthen the Management of Livestreaming Service, which required the real-name registration system for users to be put in place by livestreaming service providers. Pursuant to Notice 78 and the 2021 Streaming Guidance Opinions, online streaming platforms shall implement a real-name registration system. Under the above real-name registration system, we validate the identity information of the registered streamers primarily based on their identification cards and validate the identity information of the registered users primarily based on their mobile numbers. Currently, we are not required to obtain information such as legal names, citizen identification cards or other personal information during the registration process to validate the identity information of our users who are not streamers. However, the PRC government authorities may further tighten the real-name registration requirements or require us to implement a more thorough compulsory real-name registration system such as adopting a mandatory face-recognition system for all users on our platform in the future. If we were required to implement a more rigid real-name registration system for users on our platform, our users’ experiences on the platform may be downgraded and potential users may be deterred from registering with our platform, which may in turn negatively affect the growth of our user base and prospects.
 
   
Pursuant to Notice 78 and the 2021 Streaming Guidance Opinions, the online streaming platforms shall adopt a tiered and classified management system over the streamers accounts, with the streamer accounts managed in different tiers and classes based on the nature of the streamers, operational contents, number of fans, popularity of the streaming, time limit of the streaming and other factors. Online streaming platforms shall set up appropriate limitations for streamers’ accounts in different tiers or classes in terms of the total amount of virtual gifts received in any single session of streaming performance, the popularity of the streaming, the time length of the streaming, the sessions of the streaming in any single day, the time gap between different streaming sessions and other factors, and take necessary warning measures against the streamers who violate relevant laws and regulations. In addition, the online streaming platforms are required, among other things, to set up appropriate limitations for the maximum purchase price for each virtual gift and the maximum value of virtual gifts that the users send to the streamers each time. As Notice 78 and the 2021 Streaming Guidance Opinions are relatively new and pending further interpretation and implementation, we are still in the process of waiting for further guidance from regulatory authorities and evaluating the applicability and effect of the various requirements under Notice 78 and the 2021 Streaming Guidance Opinions. Moreover, if the government requires us to supervise the streamers and their streaming sessions in a stricter method, we may incur additional cost and our user experiences may be downgraded, which may further adversely affect our ability to attract viewers and streamers.
 
   
The evolving PRC regulatory system for the Internet industry may lead to the establishment of new regulatory agencies. For example, in May 2011, the State Council announced the establishment of a new department, the State Internet Information Office. The primary role of this new agency is to facilitate the policy-making and legislative development in this field to direct and coordinate with the relevant departments in connection with online content administration and to deal with cross-ministry regulatory matters in relation to the Internet industry. We are unable to determine what policies this new agency or any new agencies to be established in the future may have or how they may interpret existing laws, regulations and policies and how they may affect us. On May 14, 2019, the Ministry of Culture and Tourism declared in a circular that it would no longer assume the responsibility of supervising the online games industry and would no longer approve or issue the Online Culture Operating Permits regarding online games. The Online Culture Operating Permits held by Wuhan Ouyue, one of the VIEs, no longer contained content related to online games operation when we renewed it upon expiration in 2020. We believe it is not necessary for an enterprise to obtain Online Culture Operating Permits to operate an online game operation business since the Ministry of Culture and Tourism no longer assumes the responsibility to supervise the operation of online games. As of the date of this annual report, no PRC laws and regulations have been officially promulgated to clarify whether the responsibility of supervising the online games and virtual currency previously taken by the Ministry of Culture and Tourism will be
re-designated
to another government agency or if so, whether such other government agency taking over the responsibility will require similar or new regulatory requirements for operating online games and virtual currencies. Further, new laws, regulations or policies may be promulgated or announced that will regulate Internet activities, including online video and online advertising businesses. If these new laws, regulations or policies are promulgated, additional licenses may be required for our operations. If our operations do not comply with these new regulations after they become effective, or if we fail to obtain any licenses required under these new laws and regulations, we could be subject to penalties.
 
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In recent years, PRC government has introduced new laws and regulations to reflect its growing concern about the negative impacts of the internet on society, particularly the impacts of internet on minors. On April 15, 2007, eight PRC government authorities, including the General Administration of Press and Publication, or the GAPP, the Ministry of Education, the Ministry of Public Security and the Ministry of Information Industry (which is the predecessor of MIIT), issued a notice requiring all Chinese online game operators to adopt an “anti-fatigue system” in an effort to curb addiction to online games by minors. As of October 1, 2011, online game players in China are required to register and verify their names and identity card numbers with the National Citizen Identity Information Center, a subordinate public institution of the Ministry of Public Security, before playing an online game. On October 25, 2019, the GAPP issued the Circular on Preventing Minors from Indulging in Online Games to reiterate the requirements on real name registration and verification, the anti-indulgence system for minors, and other measures to address relevant minors’ issues on the online games. Pursuant to the 2021 Streaming Guidance Opinions, an online streaming platform shall not be allowed to open the streamer account for users under 16, and shall only open the streamer account for users between
16-18
with their guardians’ prior consents. The 2021 Streaming Guidance Opinions also require all online streaming platforms to adopt a “teenager mode” to prevent the minor users from obsessive use of the platforms, block detrimental content to the minor users, and refrain from providing virtual gift purchase services to the minors. In addition, online streaming platforms shall establish a customer service team exclusively for minor users to address their complaints and disputes in a timely manner. The online streaming platforms shall make refunds in the event that a minor user purchases virtual gifts for the streamers by using an adult account. As of the date of this annual report, we have taken certain measures including displaying a
pop-up
page to guide the minors to use the “teenage mode”, requiring the users to enter the guardian password if the usage time under the “teenage mode” reaches 40 minutes per day and building up an exclusive content pool for the minors in which contents that are not appropriate for the minors are screened out. Despite the measures we have taken, however, minor users may still use our services through adult accounts if their guardians fail to keep minors under responsible supervision when using our services. On August 30, 2021, the GAPP issued the Circular on Further Strengthening Regulation to Effectively Prevent Online Gaming Addictions among Minors, pursuant to which online game operators are only allowed to provide online game services to minors from 8:00 p.m. to 9:00 p.m. on Fridays, Saturdays, Sundays and public holidays. The restrictions above may lead to a decrease in the number or engagement of game players, which could adversely affect our game livestreaming service and have a material effect on our results of operations. More stringent government regulations could be promulgated in future, which will also adversely affect our results of operations by deterring viewers to use our platform or downgrading our viewers’ experiences on our platform.
The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the Internet industry have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, Internet businesses in China, including our business. There are also risks that we may be found to violate existing or future laws and regulations given the uncertainty and complexity of China’s regulation of Internet business.
Increases in the costs of content on our platform, such as higher streamer compensation and recruitment cost for top streamers, may have an adverse effect on our business, financial condition and results of operations.
We need to continue offering popular and attractive content on our platform to provide our viewers with engaging and satisfying viewing experiences, and our ability to provide such content is dependent on our ability to attract and retain top streamers. We enter into exclusive contracts with our top streamers, under which they are paid a base compensation in addition to a certain percentage of the sales of virtual gifts that they receive. We also sponsor pro players and eSports teams to have them stream their gameplay on our platform. The compensation and recruitment costs that we incur with respect to retaining top streamers may increase, depending on the streamers’ revenue contribution. If our competitor platforms offer higher compensation with an intent to attract our popular streamers, costs to retain our streamers may increase. If we are not able to continue to retain our streamers and produce high quality content on our platform at commercially acceptable costs, our business, financial condition and results of operations would be adversely impacted. Furthermore, as our business and user base further expands, we may have to devote more resources in encouraging our streamers to produce content that meets the varied interests of a diverse user base, which would increase the costs of contents on our platform. If we are unable to generate sufficient revenues that outpace our increased content costs, our business, financial condition and results of operations may be materially and adversely affected.
Any compromise to the cyber security of our platform could materially and adversely affect our business, reputation and results of operations.
On November 7, 2016, the SCNPC released the PRC Cyber Security Law, which took effect on June 1, 2017. The PRC Cyber Security Law requires network operators to fulfill certain obligations to safeguard security in cyberspace and enhance network information management.
 
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Our products and services are generally provided through the Internet and involve the storage and transmission of users’ information. Any security breach would expose us to a risk of loss of information and result in litigation and potential liability. As the techniques used to obtain unauthorized access, disable or degrade Internet services or sabotage operating systems change frequently and often are not recognized until launched against a target, we may not be able to anticipate such techniques or implement adequate preventative measures. Our user data is encrypted and saved in two different places within our internal servers rather than client-based servers, protected by access control, and further backed up in our long-distance disaster recovery system, so as to minimize the possibility of data loss or breach. Upon a security breach, our technical team will be notified immediately and coordinate with the local supporting staff to diagnose and solve the technical problems. As of the date of this annual report, we have not experienced any material incidents of security breach.
Despite the security measures we have implemented, our facilities, systems and procedures and those of our third-party providers, may be vulnerable to security breaches, acts of vandalism, software viruses, misplaced or lost data, programming or human errors or other similar events which may disrupt our delivery of services or expose the confidential information of our users and others. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed, we may lose current and potential users and may be exposed to legal and financial risks, including legal claims, regulatory fines and penalties, which in turn could adversely affect our business, reputation and results of operations.
Our operations depend on the performance of the Internet infrastructure and fixed telecommunications networks in China, which may experience unexpected system failure, interruption, inadequacy or security breaches.
Almost all access to the Internet in China is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of MIIT. Moreover, we primarily rely on a limited number of telecommunication service providers to provide us with data communications capacity through local telecommunications lines and Internet data centers to host our servers. We have limited access to alternative networks or services in the event of disruptions, failures or other problems with China’s Internet infrastructure or the fixed telecommunications networks provided by telecommunication service providers. Web traffic in China has experienced significant growth during the past few years. Effective bandwidth and server storage at Internet data centers in large cities such as Beijing are scarce. With the expansion of our business, we may be required to upgrade our technology and infrastructure to keep up with the increasing traffic on our platform. We cannot assure you that the Internet infrastructure and the fixed telecommunications networks in China can support the demands associated with the continued growth in Internet usage. If we cannot increase our capacity to deliver our online services, we may not be able to accommodate the increases in traffic we anticipate from our expanding user base, and the adoption of our services may be hindered, which could adversely impact our business and profitability.
In addition, we have no control over the costs of the services provided by telecommunication service providers. If the prices we pay for telecommunications and Internet services rise significantly, our results of operations may be materially and adversely affected. Furthermore, if Internet access fees or other charges to Internet users increase, some users may be prevented from accessing the mobile Internet and thus cause the growth of mobile Internet users to decelerate. Such deceleration may adversely affect our ability to continue to expand our user base.
The proper functioning of our platform is essential to our business. Any disruption to our IT systems could materially affect our ability to maintain the satisfactory performance of our platform.
The proper functioning of our platform is essential to our business. The satisfactory performance, reliability and availability of our IT systems are critical to our success and our ability to provide content to attract and retain users.
Our technology or infrastructure may not function properly at all times. Any system interruptions caused by telecommunications failures, computer viruses, hacking or other attempts to harm our systems could result in the unavailability or slowdown of our platform and the attractiveness of content provided on it. Our servers may also be vulnerable to computer viruses, physical or electronic
break-ins
and similar disruptions, which could lead to system interruptions, website or mobile app slowdown or unavailability or loss of data. Any such occurrences could cause severe disruption to our daily operations. As a result, our reputation may be materially and adversely affected, our market share could decline and we could be subject to liability claims.
Our core values of focusing on user experience and satisfaction first and acting for the long-term may conflict with the short-term operating results of our business, and also negatively impact our relationships with advertisers or other third parties.
One of our core values is to focus on user experience and satisfaction, which we believe is essential to our success and serves the best, long-term interests of our company and our shareholders. Therefore, we have made, and may make in the future, significant investments or changes in strategy that we think will benefit our users, even if our decision negatively impacts our operating results in the short-term. For example, in order to provide users of our platform with uninterrupted entertainment options, we do not place significant advertising on our platform. While this decision adversely affects our operating results in the short-term, we believe it enables us to provide higher quality user experience on our platform, which will help us expand and maintain our current large user base and create better monetizing potential in the long-term. In addition, this philosophy of putting our users first may also negatively impact our relationships with advertisers or other third parties, and may not result in the long-term benefits that we expect, in which case the success of our business and operating results could be harmed.
 
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We cooperate with various talent agencies to manage our streamers. If we are not able to maintain our relationship with talent agencies, our operations may be materially and adversely affected.
We cooperate with talent agencies to manage and organize streamers on our platform. As we are an open platform that welcomes all streamers to register on our platform, cooperation with talent agencies increases our operational efficiency in terms of discovering, supporting and managing streamers in a more organized and structured manner and turning amateur streamers to full-time streamers.
We pay certain of our streamers or their talent agencies fees based on a percentage of revenue from virtual gift sales that is attributable to the streamers’ livestreams. If we cannot balance the interests between us and the streamers and the talent agencies design a compensation system that is agreeable to both streamers and talent agencies, we may not be able to retain or attract streamers or talent agencies, or both.
In addition, some of the talent agencies have exclusive cooperation relationships with us. If other platforms offer better incentive to talent agencies, such talent agencies may choose to devote more of their resources to streamers who stream on the other platforms, or they may encourage their streamers to use or even enter into an exclusive agreement with other platforms, all of which could materially and adversely affect our business, financial condition and results of operations.
We use third-party services and technologies in connection with our business, and any disruption to the provision of these services and technologies to us could result in adverse publicity and a slowdown in the growth of our users, which could materially and adversely affect our business, financial condition and results of operations.
Our business depends upon services provided by, and relationships with, third parties. For example, some third-party software we use in our operations is currently publicly available without charge. If the owner of any such software decides to make claims against us, charge users, or no longer makes the software publicly available, we may need to enter into settlement with such owners, incur significant cost to license the software, find replacement software or develop it on our own. If we are unable to find or develop replacement software at a reasonable cost, or at all, our business and operations may be adversely affected.
Our overall network relies on broadband connections provided by third-party operators and we expect this dependence on third parties to continue. The networks maintained and services provided by such third parties are vulnerable to damage or interruption, which could impact our results of operations. See “—Our operations depend on the performance of the Internet infrastructure and fixed telecommunications networks in China, which may experience unexpected system failure, interruption, inadequacy or security breaches.”
We also sell a significant portion of our products and services through third-party online payment systems. If any of these third-party online payment systems suffer from security breaches, users may lose confidence in such payment systems and refrain from purchasing our virtual gifts online, in which case our results of operations would be negatively impacted.
We exercise no control over the third parties with whom we have business arrangements. For some services and technologies, such as online payment systems, we rely on a limited number of third-party providers with limited access to alternative networks or services in the event of disruptions, failures or other problems. If such third parties increase their prices, fail to provide their services effectively, terminate their service or agreements or discontinue their relationships with us, we could suffer service interruptions, reduced revenues or increased costs, any of which may have a material adverse effect on our business, financial condition and results of operations.
Our business depends on a strong brand, and any failure to maintain, protect and enhance our brand would hurt our ability to retain or expand our user and customer base, or our ability to increase their level of engagement.
In China, we market our services under the brand “斗鱼”. Our business and financial performance are highly dependent on the strength and the market perception of our brand and services. A well-recognized brand is critical to increasing our user base and, in turn, facilitating our efforts to monetize our services and enhancing our attractiveness to customers. From time to time, we conduct marketing activities across various media to enhance our brand and to guide public perception of our brand and services. In order to create and maintain brand awareness and brand loyalty, to influence public perception and to retain existing and attract new mobile users, customers and platform partners, we may need to substantially increase our marketing expenditures. Since we operate in a highly competitive market, brand maintenance and enhancement directly affect our ability to maintain our market position. We must exercise strict quality control of our platform to ensure that our brand image is not tarnished by substandard products or services. We must also find ways to distinguish our platform from those of our competitors. If for any reason we are unable to maintain and enhance our brand recognition, or if we incur excessive expenses in this effort, our business, results of operations and prospects may be materially and adversely affected.
 
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Concerns about the collection, use and disclosure of personal data and other privacy-related and security matters could deter customers and users from using our services and adversely affect our reputation and business.
We collect, process, and store data concerning our users, business partners and employees, including personal and transaction data involving our users. Concerns about our practices with regard to the collection, use or disclosure of personal information or other privacy-related and security matters, even if unfounded, could damage our reputation and operations.
On November 28, 2019, the Secretary Bureau of the CAC, the General Office of the MIIT, the General Office of the Ministry of Public Security and the General Office of the SAMR promulgated the Identification Method of Illegal Collection and Use of Personal Information Through App, which provides guidance for the regulatory authorities to identify the illegal collection and use of personal information through mobile apps, and for the app operators to conduct self-examination and self-correction and for other participants to voluntarily monitor compliance. The PRC Constitution, the PRC Criminal Law, the PRC Civil Code and the PRC Cyber Security Law protect individual privacy in general, which requires certain authorization or consent from Internet users prior to collection, use or disclosure of their personal data and also protection of the security of the personal data of such users. In particular, Amendment 7 to the PRC Criminal Law prohibits institutions, companies and their employees in the telecommunications and other industries from selling or otherwise illegally disclosing a citizen’s personal information obtained during the course of performing duties or providing services. On January 23, 2019, the Office of the Central Cyberspace Affairs Commission and other authorities jointly vowed to carry out special campaigns against illegal collection and usage of personal information by mobile Internet application operators, including collecting personal information irrelevant to their services, or forcing users to give authorization in disguised manner. On July 22, 2020, the MIIT issued the Notice on Carrying out Special Rectification Actions in Depth against the Infringement on Users’ Rights and Interests by Apps to urge app service providers, among others, to strengthen the protection of users’ personal information in relation to the download, installing and upgrade of apps. On March 12, 2021, the CAC, the MIIT and the Ministry of Public Security issued the Notice on Promulgation of the Rules on the Scope of Necessary Personal Information for Common Types of Mobile Internet Applications, which provides that network operators shall not collect personal information irrelevant to the services they provide and the app operators shall not refuse to provide basic services to users on the grounds of users’ refusal to provide their personal
non-essential
information. Further, on August 20, 2021, the SCNPC promulgated the PRC Personal Information Protection Law, which became effective on November 1, 2021. The PRC Personal Information Protection Law provides detailed rules on how to handle personal information and sets forth legal responsibilities. See “Item 4. Information of the Company—4.B. Business Overview—Regulation—Regulations Relating to Privacy Protection” for detailed information. Our internal policy requires our employees to protect the personal data of our users, and employees who violate such policy are subject to disciplinary actions, including dismissal. While we strive to comply with all applicable data protection laws and regulations, as well as our own privacy policies, any failure or perceived failure to comply may result in proceedings or actions against us by government entities or private individuals, which could have an adverse effect on our business. Moreover, failure or perceived failure to comply with applicable laws and regulations related to the collection, use, or sharing of personal information or other privacy-related and security matters could result in a loss of confidence in us by customers and users, which could adversely affect our business, financial condition and results of operations.
As we continue to expand overseas, foreign and international laws, regulations, standards, and other obligations, and changes in the interpretation of such laws, regulations, standards, and other obligations could result in increased regulation, increased costs of compliance and penalties for
non-compliance,
and limitations on data collection, use, disclosure, and transfer for us and our users. In 2016, the European Union (“EU”) adopted a new regulation governing data privacy called the General Data Protection Regulation, or the GDPR, which became effective in May 2018. The GDPR establishes new requirements applicable to the handling of personal data and imposes penalties for
non-compliance
of up to 4% of worldwide revenue. In addition, to the extent we deploy services of any third party suppliers to support our overseas business, we must continue to seek assurances from our
sub-processors
that they are handling personal data in accordance with GDPR requirements in order to meet our own obligations under the GDPR. In addition, in June 2018, the California Consumer Privacy Act, or the CCPA, which takes effect on January 1, 2020, was enacted. The CCPA gives California consumers certain rights similar to those provided by the GDPR, and users may seek similar assurances from suppliers regarding compliance.
Our overseas operations may not be successful and may be adversely affected by legal, regulatory, political and economic risks.
We began our overseas expansion through acquisition of Nonolive in 2018, which is a mobile livestreaming platform focused on the Southeast Asia market. We also expanded into other overseas markets through various channels, such as Japan and South America. As we explore the overseas markets further, we may be subject to the laws of the foreign countries in which we operate. If any of our overseas operations violate such laws, we could become subject to sanctions or other penalties, which could negatively affect our reputation, business and operating results.
 
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Our overseas expansion may not be successful and may expose us to a number of risks inherent in doing business internationally, including:
 
   
challenges in recruiting quality local streamers to attract and engage local users;
 
   
challenges in attracting local users by producing content that is appealing to them while in compliance with local rules and regulations;
 
   
challenges in monetizing local users and generating sustainable cash flow;
 
   
difficulties with staffing and managing foreign operations, which may be exacerbated as a result of dista