Dear fellow shareholders and friends,

2022 was a very special year, during which our business and personal lives of our employees faced a series of challenges, including the peaks of the pandemic. I am grateful for our colleagues, having embraced difficulties bravely and made proactive adjustments along the way. Despite the tremendous pressure, we achieved fairly good results.

Benefiting from the steady growth of Sausage Man and the release of several self-developed games, we generated RMB2.45 billion in game revenue in 2022, representing a 22.0% increase on a year-on-year basis. Our monthly average paying users for online games also saw a substantial increase of 61.0% on a year-on-year basis to 1.573 million.

In the meantime, with continued investment in AI-based recommendation algorithm as well as our diligent product operation, the average MAUs of TapTap PRC grew by 31.3% on a year-on-year basis to 41.45 million, generating RMB978 million in revenue with a 41.3% increase on a year-on-year basis.

In 2022, our annual revenue increased by 26.9% on a year-on-year basis to RMB3.43 billion. The aforementioned figures were all-time high in our Company’s history. Our gross profit also increased by 49.7% on a year-on-year basis to RMB1.84 billion, while adjusted EBITDA was improved substantially by 56.7% on a year-on-year basis to RMB-353 million.

Despite the challenging environment last year, we were able to achieve the above results, thanks to the hard work and dedication of our colleagues. I am so proud of everyone. However, apart from these impressive results, there are still some regrets and concerns. For example, game development progress was delayed, the commercial performance of newly launched games did not meet our expectations, and the progress of the overseas version of TapTap has been slow. While the growth for TapTap has been profound in China, we are faced with an expanding user base and run the risk of diluting our community culture. With TapTap offering an increasingly diverse range of features, there were lapses of product and service updates at times that may have bothered game developers and players. This year marks the 6th anniversary of TapTap, and we shall continue to strive to maintain the vitality as before and carry on as the boldly different and industry-changing TapTap that we set out to be.

Although we were able to achieve record-high and significantly reduce losses last year, our projects and team size, needless to say, have been downsized. The number of employees has decreased from the peak of more than 2,300 to over 1,600 at present. Such downsizing may put extra pressure on some of our existing business operations and may also cause the Company to miss potential opportunities. At the core of this lies our overly aggressive strategies from the past, with expectations beyond our own capabilities and unsubstantiated optimism about the external environment.

In light of this, we have deeply reflected on our past actions and will be adjusting our goals this year to focus our efforts and resources on completing the tasks at hand and refining them, rather than pursuing short-term flashy gimmicks. Through steady growth and efficient management, we strive to make the Company’s cash flow positive, while providing a platform for our employees to feel accomplished our players entertained, and game developers satisfied.

These goals may sound simple, but certainly come with many challenges in practice. Like many other gaming companies, XD underwent expansion a few years ago. At that time, everyone in the industry had high expectations for the future. People believed that things were on a straight path to getting better each year for the Company, the industry, and us personally. However, reality has proved otherwise. Last year, everyone not only had to overcome many difficulties in their personal lives, but also faced with project reductions, team restructuring, and even had to bid farewell to familiar coworkers for various reasons.

In the 20-year entrepreneurial journey at XD, we have not only achieved great success but, more importantly, also went through many failures, setbacks, and blows together. I believe that these failures cannot defeat us but instead serve as wake-up calls, pushing us to think calmly and reigniting our ambition. Like so many times in the past, we can overcome difficulties, solve problems, find new breakthroughs and greater growth opportunities by working together.

As hype for the gaming industry wears off, we are left with people who truly love and believe in it. In a more calm and pragmatic industry environment, we can also reflect more deeply on our mission to “impact each and every gamer through the spirit of craftsmanship.”

No matter how the world changes around us, we will still insist on producing high-quality, globally-oriented products that emphasize unique gameplay, rather than scammy and mindless pay-to-win games. We will devote ourselves into developing meticulous gaming content and engaging our player communities authentically, bringing fun and joy to our family, friends, and players. These are the directions and goals we have always adhered to. They have also served as our beliefs and guided us in defining what makes a good game, as well as helping game developers put their brilliant games in front of gamers around the world.

This year, despite there are still many challenges, the industry environment has begun to recover, and everyone feels positive and confident about the future. Our Company has made considerable progress in our technology and R&D capabilities, and will continue to invest continuously to fully prepare for new technologies and new changes.

We are on track to launching Torchlight: Infinite (火炬之光:無限) and T3 Arena (火力蘇打) in China in mid-2023. Based on existing user feedback and our experience from international markets, we have implemented significant adjustments and optimizations in localizing them for China. Additionally, as both games are organized around seasonal events, we will be launching regular updates and marketing campaigns on a seasonal basis.

We have also finished the in-house development of the pixel art tactical RPG “Sword of Convallaria” (鈴蘭之劍) and it is expected to be released this year globally after an ISBN is issued.

The online game “Sausage Man” (香腸派對) plans to launch a PC version this year, hoping to expand the user base of “Sausage Man” (香腸派對) through high-quality PC experience. ” Ragnarok M: Eternal Love” (仙境傳說RO) has been online for 6 years, and will still undergo major updates this year, continuously improving the user experience and exploring new systems architecture using new technologies. In addition, the Company also has multiple games such as ” XD Town” (心動小鎮), ” Go Go Muffin” (奔跑吧麥芬), ” Etheria” (伊瑟), etc., and plans to conduct tests based on their respective development progress within this year.

In China, TapTap will continue to receive new iterations and upgrades in listening to and engaging game developers and players more closely in order to better meet their needs. We will make continuous optimizations to the ratings and comments system to uphold the quality of the ratings and their importance in the decision-making process. Moreover, we will make further improvements to the infrastructure such as game library, achievements, and friends etc. to boost the utility of user accounts; combined with TDS, games will be able to make more meaningful and effective connections to these accounts.

The global version of TapTap will continue its efforts to cultivate a core user community this year and begin operations in East Asia. We will cooperate with game developers from China to support testing, pre-registrations, and retaining core players on a global scale.

In addition, legislators in European Union, the United States, and other markets are continuing to call for iOS and Android ecosystems to open up. It is possible that, in the foreseeable future, an iOS update will bring accessibility to third-party app stores. We will closely follow this trend, as it is inevitable for mobile operating systems to offer free and open access to app stores, and it will be a remarkable opportunity for TapTap. We are well- equipped to provide services to users on all platforms, including iOS.

Since the end of last year, the hottest industry topic has been AI. In the past 20 years of XD, we had the privilege to witness and experience the widespread adoption of the Internet and the birth of wireless internet, and we were fortunate to have been a part of this movement at times and launched several popular products. Language models like GPT have brought us in awe and made us think, far beyond anything and everything we have experienced in the past 20 years. AI will completely change the way content is developed and produced, as well as how users consume content and interact with information. Whether it is TapTap or our games, we are blessed with the opportunity to seize this technological breakthrough and its benefits. We have already been well-versed in AI-based technologies with our recommendation algorithms and talents. We hope to leverage this advantage in making more breakthroughs in AIGC and developing new content and features that exceed player expectations. Finally, I would like to extend my appreciation for our Shareholders for their long-standing trust and support. Many of our current investors are game developers and gamers themselves, and we understand that their decisions to invest in XD is not just for capital returns, but more importantly it is also a validation of our philosophy and values. Therefore, it is our undisputable priority to stand by these principles recognized by our
investors, colleagues, and players, and have confidence in the impact of these principles generate that can create long-term value for the Company, Shareholders, and the industry.

Huang Yimeng

Chairman of the Board, XD Inc