NetDragon Websoft : CONTINUING CONNECTED TRANSACTIONS - CHANGE IN ONE OF THE REGISTERED OWNERS OF THE PRC OPERATING ENTITY UNDER THE EXISTING ND STRUCTURE CONTRACTS

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NetDragon Websoft Holdings Limited

網龍網絡控股有限公司

(incorporated in the Cayman Islands with limited liability)

(Stock Code: 777)

CONTINUING CONNECTED TRANSACTIONS

CHANGE IN ONE OF THE REGISTERED OWNERS OF

THE PRC OPERATING ENTITY

UNDER THE EXISTING ND STRUCTURE CONTRACTS

Reference is made to the section headed "Structure Contracts" in the Prospectus in relation to, among other things, the Existing VIE Structure.

On 3 May 2021, the relevant parties below have entered into the following agreements to address the departure of one of the Existing Registered Owners, being Mr. Liu, our executive Director and one of the Controlling Shareholders to transfer his equity interest in NetDragon (Fujian) to Mr. Zheng, our executive Director, one of the Controlling Shareholders and the cousin of Mr. Liu:-

1. the Equity Transfer Agreement dated 3 May 2021 entered into between Mr. Liu and Mr. Zheng, pursuant to which Mr. Liu agreed to transfer 3.2337% equity interest in NetDragon (Fujian) to Mr. Zheng at a consideration of RMB9,701,050;
2. the Pledge Release Agreement dated 3 May 2021 entered into between TQ Digital and Mr. Liu, pursuant to which TQ Digital and Mr. Liu agreed to release the pledge over Mr. Liu's equity interest in NetDragon (Fujian); and
3. the Supplemental ND Structure Contracts dated 3 May 2021, which included: -
4. 1. the Supplemental Equity Interest Pledge Agreement dated 3 May 2021 entered into between TQ Digital and Mr. Zheng, pursuant to which Mr. Zheng agreed to grant to TQ Digital a continuing first priority security interests over the equity interest as a result of the Equity Transfer; and

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1. the Supplemental Agreement dated 3 May 2021 entered into between TQ Digital, NetDragon (Fujian) and the Existing Registered Owners to amend (a) the Agreement for the Exclusive Right to Acquire Equity Interest and Assets; (b) the Equity Holders' Voting Rights Proxy Agreement; and (c) the Equity Interest Pledge Agreement, pursuant to which, among other things, upon completion of registration of change in equity interest as a result of the Equity Transfer at the relevant PRC authority, Mr. Liu shall be released from all rights and obligations under these three agreements, and the rights and obligations imposed on TQ Digital, NetDragon (Fujian) and the Remaining Registered Owners under these three agreements remain unchanged.

IMPLICATIONS UNDER THE LISTING RULES

Following the signing of the Supplemental ND Structure Contracts, the financial results of NetDragon (Fujian) will continue to be accounted for and consolidated in the accounts of the Group as if it were a wholly-owned subsidiary of the Company. As Mr. Liu, Mr. Liu Luyuan and Mr. Zheng, being the executive Directors and the Controlling Shareholders, are interested in an aggregate of 99.96% of NetDragon (Fujian) (prior to the completion of the Equity Transfer), NetDragon (Fujian) is technically an associate of Mr. Liu, Mr. Liu Luyuan and Mr. Zheng, and therefore connected person of the Company under Chapter 14A of the Listing Rules. Accordingly, the transactions contemplated under the Supplemental ND Structure Contracts constitute continuing connected transactions of the Company under Chapter 14A of the Listing Rules.

Since the Supplemental ND Structure Contracts are supplemental to the Existing ND Structure Contracts to address the departure of Mr. Liu and other terms of the Existing ND Structure Contracts remain unchanged and in full force and effect, the Company has sought confirmation from the Stock Exchange, and the Stock Exchange has confirmed, that the transactions contemplated under the Existing ND Structure Contracts amended by the Supplemental ND Structure Contracts would continue to fall within the scope of the IPO Waiver.

BACKGROUND

Reference is made to the section headed "Structure Contracts" in the Prospectus in relation to, among other things, the Existing VIE Structure. Unless otherwise defined, terms used herein shall have the same meanings as those defined in the Prospectus.

On 3 May 2021, the relevant parties below have entered into the following agreements to address the departure of one of the Existing Registered Owners, being Mr. Liu, our executive Director and one of the Controlling Shareholders to transfer his equity interest in NetDragon (Fujian) to Mr. Zheng, our executive Director, one of the Controlling Shareholders and the cousin of Mr. Liu:-

1. the Equity Transfer Agreement dated 3 May 2021 entered into between Mr. Liu and Mr. Zheng, pursuant to which Mr. Liu agreed to transfer 3.2337% equity interest in NetDragon (Fujian) to Mr. Zheng at a consideration of RMB9,701,050;
2. the Pledge Release Agreement dated 3 May 2021 entered into between TQ Digital and Mr. Liu, pursuant to which TQ Digital and Mr. Liu agreed to release the pledge over Mr. Liu's equity interest in NetDragon (Fujian); and

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1. the Supplemental ND Structure Contracts dated 3 May 2021, which included: -
2. 1. the Supplemental Equity Interest Pledge Agreement dated 3 May 2021 entered into between TQ Digital and Mr. Zheng, pursuant to which Mr. Zheng agreed to grant to TQ Digital a continuing first priority security interests over the equity interest as a result of the Equity Transfer; and
   2. the Supplemental Agreement dated 3 May 2021 entered into between TQ Digital, NetDragon (Fujian) and the Existing Registered Owners to amend (a) the Agreement for the Exclusive Right to Acquire Equity Interest and Assets; (b) the Equity Holders' Voting Rights Proxy Agreement; and (c) the Equity Interest Pledge Agreement, pursuant to which, among other things, upon completion of registration of change in equity interest as a result of the Equity Transfer at the relevant PRC authority, Mr. Liu shall be released from all rights and obligations under these three agreements, and the rights and obligations imposed on TQ Digital, NetDragon (Fujian) and the Remaining Registered Owners under these three agreements remain unchanged.

Accordingly, NetDragon (Fujian) will remain a consolidated affiliated entity of the Company and its financial results will continue to be accounted for and consolidated in the accounts of the Group as if it were a wholly-owned subsidiary of the Company.

The structure contracts of Best Assistant will not need to be amended since Mr. Liu is not party to them.

REASONS FOR AND BENEFITS OF THE EQUITY TRANSFER

As disclosed in the Prospectus and as of the date of this announcement, the businesses operated by the Group include the operation of online games and ongoing maintenance of developed games in the PRC which is considered as value-added telecommunications services. Pursuant to applicable PRC laws and regulations, foreign investors are restricted to conduct value-added telecommunications services business, and accordingly, the Group has adopted the Existing VIE Structure, which has enabled the Group, through its wholly-owned subsidiaries, TQ Digital and TQ Online, to exercise control over NetDragon (Fujian) that hold the relevant license required for carrying out the such services and operating the aforementioned business) and to consolidate its financial results into the Group's results.

The reason for the Equity Transfer is to improve the administration efficiency of NetDragon (Fujian). As Mr. Liu, one of the Existing Registered Owners, is responsible for the overall business strategic development of the Group and he is also the chief game designer of the Group's game development team. Due to the expansion of the Group's overseas business and the increase in the relevant revenue, Mr. Liu requires more time in handling overseas business. To improve administrative efficiency, various administrative matters or filings of NetDragon (Fujian) could be more efficiently and effectively managed by Mr. Zheng, who is the legal representative and director of NetDragon (Fujian). The Directors also consider that the Equity Transfer would enable the Group to strengthen its global strategy by allowing Mr. Liu to devote more of his time to the Group's business worldwide while achieving administrative convenience in the daily operation of NetDragon (Fujian).

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The PRC Legal Adviser has confirmed that the Supplemental ND Structure Contracts (i) are not in violation of applicable laws and regulations in the PRC; (ii) do not fall into the circumstances that will invalidate the contracts under the Civil Code of the People's Republic of China; and (iii) are legally binding on the parties under the laws of the PRC.

Based on the above and as advised by the PRC Legal Adviser, since the Supplemental ND Structure Contracts are only entered into to address the departure of Mr. Liu who will no longer be holder of equity interest in NetDragon (Fujian), and all other terms under the Existing ND Structure Contracts remain unchanged and in full force and effect, the Directors are of the view that each of the arrangements under the Supplemental ND Structure Contracts conferring significant control and economic benefits from NetDragon (Fujian) is enforceable under the relevant laws and regulations.

The Directors (including the independent non-executive Directors) are of the view that each of the Supplemental ND Structure Contracts is on normal commercial terms, fair and reasonable and in the interests of the Group and the Shareholders as a whole. Mr. Liu, Mr. Liu Luyuan and Mr. Zheng had material interest in the Supplemental ND Structure Contracts, and accordingly they had abstained from voting at the meeting of the Board to approve the entering into of the Supplemental ND Structure Contracts and the Pledge Release Agreement.

As of the date of this announcement, the Company has not encountered any interference or encumbrance from any PRC governing bodies in operating its businesses through NetDragon (Fujian) under the Existing VIE Structure.

EQUITY TRANSFER AGREEMENT

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SUPPLEMENTAL ND STRUCTURE CONTRACTS

On 3 May 2021, the relevant parties entered into the following Supplemental ND Structure Contracts to address the Equity Transfer:

1. Supplemental Equity Interest Pledge Agreement; and
2. Supplemental Agreement.

The principal terms of the Supplemental ND Structure Contracts are set out below:

1. Supplemental Equity Interest Pledge Agreement

2. Supplemental Agreement

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Save as disclosed above, all the other terms under the Existing ND Structure Contracts remain unchanged and in full force and effect.

INFORMATION OF THE PARTIES

The Company is incorporated in Cayman Islands with limited liability, the Shares of which are listed on the Main Board of the Stock Exchange. The Group is principally engaged in the development and operation of online games and education business.

TQ Digital is a wholly foreign-owned enterprise established in the PRC and an indirect wholly- owned subsidiary of the Company. TQ Digital is principally engaged in development of online games and licensing and servicing of the developed games.

NetDragon (Fujian) is a limited liability company established in the PRC and a consolidated affiliated entity of the Company. NetDragon (Fujian) is principally engaged in the operation of online games. NetDragon (Fujian) holds an ICP license which are required to carry out its operations and ongoing maintenance of developed games in the PRC which is considered as value- added telecommunications services.

Each of Mr. Liu and Mr. Zheng is the executive Director and one of the Controlling Shareholders. Mr. Zheng is the cousin of Mr. Liu.

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IMPLICATIONS UNDER THE LISTING RULES

Following the signing of the Supplemental ND Structure Contracts, the financial results of NetDragon (Fujian) will continue to be accounted for and consolidated in the accounts of the Group as if it were a wholly-owned subsidiary of the Company. As Mr. Liu, Mr. Liu Luyuan and Mr. Zheng, being the executive Directors and the Controlling Shareholders, are interested in an aggregate of 99.96% of NetDragon (Fujian) (prior to the completion of the Equity Transfer), NetDragon (Fujian) is technically an associate of Mr. Liu, Mr. Liu Luyuan and Mr. Zheng, and therefore connected person of the Company under Chapter 14A of the Listing Rules. Accordingly, the transactions contemplated under the Supplemental ND Structure Contracts constitute continuing connected transactions of the Company under Chapter 14A of the Listing Rules.

Since the Supplemental ND Structure Contracts are supplemental to the Existing ND Structure Contracts to address the departure of Mr. Liu and other terms of the Existing ND Structure Contracts remain unchanged and in full force and effect, the Company has sought confirmation from the Stock Exchange, and the Stock Exchange has confirmed, that the transactions contemplated under the Existing ND Structure Contracts amended by the Supplemental ND Structure Contracts would continue to fall within the scope of the IPO Waiver.

DEFINITIONS

In this announcement, unless the context otherwise requires, the following words and expressions shall have the meanings ascribed to them below:

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"Supplemental Agreement" the supplemental agreement dated 3 May 2021 between TQ Digital, NetDragon (Fujian) and the Existing Registered Owners to amend (a) the Agreement for the Exclusive Right to Acquire Equity Interest and Assets; (b) the Equity Holders' Voting Rights Proxy Agreement; and (c) the Equity Interest Pledge Agreement

On behalf of the Board

NetDragon Websoft Holdings Limited

Liu Dejian

Chairman

Hong Kong, 3 May 2021

As at the date of this announcement, the Board of the Company comprises five executive Directors, namely Mr. Liu Dejian, Dr. Leung Lim Kin Simon, Mr. Liu Luyuan, Mr. Zheng Hui and Mr. Chen Hongzhan; one non-executive Director, namely Mr. Lin Dongliang; and three independent non-executive Directors, namely Mr. Chao Guowei, Charles, Mr. Lee Kwan Hung and Mr. Liu Sai Keung, Thomas.

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