Business Context and Reporting Period
The9 Limited, a Chinese online game developer and operator, filed Form 6-K on April 7, 2017. The filing discloses unaudited consolidated financial information for the six months ended December 31, 2016, and the balance sheet as of that date. The company operates proprietary MMO and mobile games, including "CrossFire" mobile titles, and engages in mobile advertising and app education businesses.
Key Financial Metrics (Six Months Ended Dec 31, 2016)
| Metric | Value (RMB) | Value (US$) |
|---|---|---|
| Total Net Revenues | 33,212,524 | 4,783,598 |
| Gross Profit | 13,029,431 | 1,876,628 |
| Loss from Operations | (113,859,550) | (16,399,187) |
| Net Loss Attributable to Holders of Ordinary Shares | (236,615,781) | (34,079,763) |
| Cash and Cash Equivalents (Dec 31, 2016) | 38,878,076 | 5,599,608 |
| Total Assets (Dec 31, 2016) | 350,891,994 | 50,538,960 |
| Total Liabilities (Dec 31, 2016) | 806,175,318 | 116,113,398 |
| Shareholders' Equity (Deficit) (Dec 31, 2016) | (702,054,457) | (101,116,874) |
Material Changes vs. Prior Period
- Revenue Growth: Total net revenues increased to RMB 33.2 million for the six months ended Dec 31, 2016, compared to RMB 22.1 million for the same period in 2015.
- Profitability Deterioration: Despite revenue growth, the company reported a significant net loss attributable to ordinary shareholders of RMB 236.6 million, compared to a loss of RMB 233.9 million in the prior year period. The loss per share (basic) was RMB 9.89.
- Asset Impairments: The company recorded substantial non-cash charges, including an impairment loss on goodwill of RMB 10.6 million, impairment on intangible assets of RMB 68.0 million, and impairment on available-for-sale investments of RMB 244.8 million.
- Balance Sheet Contraction: Total assets decreased from RMB 538.1 million in 2015 to RMB 350.9 million in 2016. Total liabilities increased from RMB 600.6 million to RMB 806.2 million, driven by an increase in short-term bank borrowings to RMB 107.5 million and convertible notes to RMB 197.3 million.
Outlook, Risks, and Unusual Items
The filing does not provide specific forward-looking guidance or management commentary regarding future performance. However, the financial statements highlight significant unusual items and risks:
- Significant Impairments: The massive impairment charges on investments and intangible assets suggest a write-down of asset values, likely due to poor performance of acquired entities or investments.
- Liquidity and Solvency: The company holds a negative shareholders' equity position (deficit) of RMB 702 million. Total liabilities exceed total assets by a significant margin.
- Related Party Transactions: Amounts due from related parties increased to RMB 19.8 million, and amounts due to related parties increased to RMB 107.2 million, indicating heavy reliance on related party financing.
- Warrant Liability: The company recorded a fair value change gain on warrants liability of RMB 10.8 million, reducing the liability balance from RMB 64.4 million to RMB 16.4 million.
Investor Verification Checklist
- Verify the specific causes and recoverability of the RMB 244.8 million impairment on available-for-sale investments.
- Assess the company's ability to service its debt obligations given the negative equity position and increased short-term borrowings.
- Confirm the status and revenue contribution of the "CrossFire 2" joint venture and other new mobile game titles.
- Review the terms of the convertible notes (RMB 197.3 million) and related party loans to understand repayment schedules and potential dilution.
- Investigate the sustainability of the revenue growth in the face of significant operating losses and asset write-downs.