XD CEO Huang Yimeng’s Letter to Shareholders: Focus on the Company’s Long-term Value, Increase Investment in R&D, and Serve Developers Worldwide

Mr. Huang also wrote, “Our core strategy will lay more emphasis on the improvement of R&D capability instead of the increase in revenue, and the user growth rather than the rise in profits. At Xindong, what we really care about is the company’s long-term ‘value’ instead of its short-term share ‘price’, and we ensure that all decisions are made for long-term ‘value’ growth. As for our responsibilities to investors, the most important of all is to ensure the greatest transparency possible in information disclosure.”

Chairman’s Letter

Dear investors, stakeholders, and all the friends caring about us,

2019 is the first year after the Company listed on the Stock Exchange. I am pleased to take this opportunity to share the latest development of the Company with you in this annual report.

Last year, we proudly established our vision to impact each and every gamer by promoting the spirit of craftsmanship,and adhere to our corporate strategy of game development, publishing and platform development.

01 OUR VISION

Our vision “to Impact Each and Every Gamer by Promoting the Spirit of Craftsmanship” originates from our dream, as well as our knowledge of and belief in the future of this industry. As gamers, we started playing games when we were young. We love these entertaining games as they have offered us countless meaningful moments, and we cherish the craftsmen who have been constantly creating gaming masterpieces. Moreover, we firmly believe the creators and craftsmen in the game industry have also been advancing technological and cultural development in the world.

“Proudly earning rewards and remuneration from gamers through craftsmanship and techniques as a game developer” is the philosophy guiding us during the launch of RO. XD has been constantly striving to realize this philosophy over the years and by upholding the vision of “to Impact Each and Every Gamer by Promoting the Spirit of Craftsmanship”, we are making greater efforts to attract more skillful craftsmen, offering them more opportunities for realizing their strengths,thereby earning higher respect and reward. The mission stated above not only applies to our in-house R&D but also covers the responsibilities of craftsmen and roles of gamers across the entire industry.

02 OUR STRATEGY

In a nutshell, our strategy is to offer the most premium and exclusive content for TapTap through game development and publishing, boost
the growth of TapTap users with exclusive contents, retain users and generate income based on TapTap’s strengths in product operation, and reward and encourage proprietary content creation and third parties content creation through TapTap to deliver more quality contents, so as to continuously boost the growth of TapTap.

Highlight of the advantages this strategy for our game development and publishing:

Before the launch of TapTap, our game development was based on the most simple and traditional business model. We invested in game development and promotion, generated certain revenues and then reinvested a portion of profit in the next game. This model is vulnerable and may quickly run into a vicious cycle if income is unable to cover the development and promotion expenses, even if there is concern of this kind, investment in development and promotion will be cut, resulting in less product competitiveness, and eventually leads to poorer market performance. This vulnerable business model poses as a direct threat to the success of a game.

The games we developed after the advent of TapTap bring us return which is remarkably different from the past. In addition to the income generated by the games, accumulation of game IP and growth of R&D teams, more importantly,the game exclusively launched on TapTap can attract more users for TapTap. The value of these users can be quantified,and the majority of them will be retained on TapTap, generating long-term income and creating value for us.

Given the additional return brought by the platform, our return on investment (ROI) of each game is substantially increased. As such, we are more willing to scale up our development investment for the improvement of product competitiveness and R&D capability. On the other hand, we are more willing to explore the genres that are not proved under the traditional business model, such as games with low initial ROI but huge market potential, or game products with great production challenges and required relatively longer time for optimization and cultivation. Such genres of product often boast a niche market with less competition but higher expectation from users.

Meanwhile, the accumulation of TapTap users can also provide significant assistance for our initiation, positioning and pre-publishing promotion
to each game we developed and continuous help and support to our games under testing. TapTap’s goal is not to use games as a tool for traffic monetization, but to develop games as exclusive content that sustainably drives user growth. Therefore, TapTap offers continuous support to quality games with potential without considering ROI based on income generated by games (either self-developed games or third party developed games).

Therefore, our game creation could leverage on the advantages of TapTap and obtained continuous support since the initiation of our project. The additional value created platform enables us to invest more resources in game development and make bold decisions on game initiation, which are the largest strengths for our game creation, laying a solid foundation for our mission “to impact each and every gamer by promoting the spirit of craftsmanship”. Only if game development creates more revenue, can we better incentivize the game developers. Only if we have more freedom in game development, can we grant the craftman more space to create.

Strengths of this strategy brought to TapTap platform:

We established a free-to-distribute business model on the first day when TapTap was founded. We are certain that the future will be determined by the game creators. When selecting a game, the content itself is the key consideration to the gamers, rather than the platform or whether the game is recommended by the platform. Therefore, we must fully stand with game creators. We believe TapTap shall not share any profit from games but should put more resources to help and subsidize games instead.

Based on the same rationale, we are certain that the main driving force of TapTap will definitely be its exclusive content. In fact, it is not something novel. As for both the decades of competition among console game platforms and the race among video streaming platforms recently, it eventually enters the endgame of self-made content. By investing in self-developed games, we are capable of not only creating quality and exclusive contents sustainably but also improving our development capability and accumulating IPs. Meanwhile, we can deliver more returns as our self-developed games generate income itself and create extra value by bringing users to TapTap. As a result, we can make more investments in R&D to fully exert the strengths of XD as a game company with a decade history, and constantly offering quality and exclusive products for TapTap.

In addition to self-development, we actively partner with third-party companies and introduce top games into TapTap. TapTap does not request any revenue sharing from free-to-distribute model, instead TapTap willingly offers greatest support to game developers on operation, promotion and technical support. Ultimately, these actions benefit game developers and attract more contents and boost the long-term growth of TapTap.

03 GOALS FOR THE YEAR

An encouraging financial forecast for 2020 is expected by many stakeholders but we are sorry that we may not be in a position to promise.

With years of experience in this industry, we are certain that an accurate financial forecast is something what we are unable to render. Warren Buffett once said, “Charlie and I not only don‘t know today what our businesses will earn next year — we don‘t even know what they will earn next quarter. We are suspicious of those CEOs who regularly claim they do know the future— and we become downright incredulous if they consistently reach their declared targets”.

Although we are unable to present figures to everyone, we will sincerely present our plans and goals.

04 TAPTAP’S GOALS FOR THE YEAR

The product modality of TapTap has never been changed substantially since its establishment. Based on our prior experience and thorough consideration over the future, we are going to make some significant adjustments this year:

1.Product and technology

(1) For the games recommended on the homepage of TapTap, we will introduce a deep learning-based recommendation algorithm, through which, games on the homepage will be recommended and ranked in view of habits and preference of different users and based on editor’s recommendations and community ratings.

(2) TapTap community will embrace the most significant renovation, as we are going to integrate previous comment,forum, video, photo and other contents through a user-centric way, with an aim of encouraging active interaction between users and their friends, as well as users and games. With such social network, we can integrate and send messages to further improve the efficiency of collecting information, and the quality of the information.

(3) A global underlying framework will be introduce. We ceased the plan to develop an independent overseas version. We will redesign a multi-language and multi-protocol suitable underlying framework of TapTap to timely follow up the product update of the Chinese version platform, better interconnect data of global users, and to grant overseas users more access to effective information of Chinese game developers and players and any newly design products will be able to support the global version platform.

2.Developer services and tools

TapTap never adopts the business model of charging commission from games, which aligns the long term interest of the platform, game developers and players. Furthermore, we plan to build a bridge between developers and players, so that game developers may use TapTap to publish games more easily and directly exchange and communicate with gamers. Thus, we will coordinate publishing and operation resources throughout the Group to provide more detailed and effective services to developers and facilitate them to publish games on TapTap. We will restructure the technology department which provided universal product services for games of XD into the developer service department of TapTap with an intention of rendering more technical tools and services for developers and lowering the difficulty and burden of game development. At the same time, we will launch more tools for developers to use in their development, and foster a connection between games and TapTap communities. These products will be firstly used in our self-developed games or licensed games, and will be delivered to third-party developers upon completion of testing.

We believe that all these adjustments will be completed within this year. We believe there will be an all-rounded improvement for all TapTap users and developers in terms of product experience.

05 EXISTING MAJOR GAME PRODUCTS

Ragnarok M

Ragnarok Online: Eternal Love (“仙境傳說RO:守護永恒的愛, ”), launched three years ago and has been released in more than 50 countries and regions globally, and achieved great success. As of December 31, 2019, it has totally 33 million registered users and over 5 million monthly active users (MAUs), becoming one of the most popular mobile MMO games across the world. As of now, we deploy a team consisting of over 150 members to provide maintenance and support for RO. Also, we expect more input in the hope of building RO as a benchmark mobile MMO game to attract more new players and invigorating RO with a continuous quality content upgrade.

Sausage Man

Sausage Man (香腸派對) has been launched on the market for almost three years, during which both operating data and income maintain growth. It also serves as the best case study for the synergetic growing between our games and TapTap. We have established a model of stable content upgrade and monetization for Sausage Man. We believe that it will maintain stable growth with output improvement and content accumulation through continuous investment. Meanwhile,we will integrate player accounts, friendship and in-game community of both Sausage Man and TapTap this year to enhance their user experience.

06 MAJOR SELF-DEVELOPED GAMES DURING THE YEAR

With respect to self-developed games, we have eight R&D pipeline projects under different phases. Three games will be launched in this year, including those set out below.

Fantasy World (tentative name)

Fantasy World is a life simulation social game in which the player plays as a resident of a small town, and works, lives,socializes, dresses up and builds his own home. The project has been in on relatively small scale of the development phase for two years. At present, the basic framework has been completed and it has been tested on a small scale, which received highly positive feedback. The popular game Animal Crossing recently gives us a deeper understanding of games of this genre and a greater expectation for market share. We planned to invest more resources this year to push forward the R&D progress of the project and launch testing as soon as possible in order to upgrade and make growth for the game through the participation of players. The launch of Fantasy World is hopefully similar to that of Sausage Man three years ago. Instead of pursuing short-term income returns, we will gradually develop it as a big category with high DAU.

Project A (tentative name)

Project A, the largest game project invested by us since RO, has been prepared for more than a year and is a Japanese girl-style MMORPG. We aim to combine the high-quality content of an MMO with the ease of use and mild system of a card game. The game developed via UE4 engine is scheduled to be officially announced during ChinaJoy this year.

Torchlight: Infinity

Torchlight: Infinity (火炬之光:無限) is a dark themed mobile game we developed using UE4 engine under the license of the famous IP “Torchlight”. It emphasizes the infinite match of equipments and skills and continuous competition season which brings players long-term game pursuit and fresh experience. We believe that dark themed game is an extensive genre, but there has been a lack of high-quality games on mobile phones. Leveraging on TapTap’s strategic strengths, we won’t turn the game into an MMO with microtransactions, but will increase the game’s reputation and user scale through abundant and better contents.

Other Games

In addition, we have several pipeline projects, while the core gameplay of which has not been finished. There is a wide range of genres, such as casual and competitive games with high DAU expectation like Sausage Man, high-quality RPG games developed with UE4 engine, placement games developed by the RO: Idle Poring team, and pixel style SRPG. Despite the variety of genres, all of our games have one thing in common: they are unique style games driven by core gameplay with globalized themes. In the design of the monetization system, we prefer to earn gratuity from players by continuously offering abundant and playable content rather than adding up the microtransactions, to progressively and steadily cultivate users and create a positive and healthy cycle based on synergy with TapTap.

07 OUR GAME PUBLISHING BUSINESS

A directional optimization will be made in our mobile online game publishing business.

We are well positioned as a global publishing partner who is deeply involved in the initiation stage of a game project. Our value is to empower the game development and help it prosper and offer more support to our game partners by leveraging upon the strength of strategic synergy of TapTap.

Therefore, we will merge the domestic publishing team with the overseas publishing team and unify the XD Brand globally. XD will be directly responsible for the game publishing business worldwide.

Additionally, we will guadually optimize the original business model of publishing and promoting Chinese games to overseas markets. Looking ahead we will invest further more resources on the globalization of TapTap instead. We will eliminate the information gap in different markets around the world with TapTap and assist developers to use TapTap and our existing publishing and operating resources, to publish games through human resource investment, tool development and refined operation.

We are confident in the global competitiveness of Chinese game developers and look forward to going global together.

With regard to the publishing businesses of premium games, we will cooperate with high quality game developers more actively, provide them with more R&D funds and promotion resources, and introduce more quality exclusive games for TapTap.

The above is the basic description and direction of the Company’s platform, R&D and publishing business for the year 2020. We have full confidence in our strategy and future despite the daunting challenge. The biggest challenge for us lies in the current business direction, which places higher requirements for our own R&D capability, operation ability and management capabilities. More resources must be invested in the cultivation, recruitment and management of talents,otherwise it is impossible to develop the games and platforms we desire.

Thanks to our confidence in the strategy logic and expectations about future growth, this year, we will lay more emphasis on the improvement of R&D capability instead of the increase in revenue, and the user growth rather than merely the rise in profits.

These decisions will exert influence on the revenue and profits of the Company this year, as well as the development and growth for years to come. Investors’ judgment on the Company’s value will also be affected, so we need to share our strategy with you.

As for the Company, we care about the long-term “value” of XD instead of merely the short-term “share price”, and strive to ensure that all decisions are consistent with our long-term “value” growth. The most important responsibility of us is to disclose information to our investors as transparent as possible, regardless of the profit or loss on shares held by you next week, next month and next year.

Thank you for going through my lengthy statement. I hope these contents are helpful for you to gain a better understanding of XD and our insights, and make your independent investment judgment.

Looking forward to the next annual report.

HUANG Yimeng

Chairman and CEO

XD Inc.