Business Context and Reporting Period
The9 Limited (NASDAQ: NCTY), an online game developer and operator based in China, filed a Form 6-K on November 25, 2015. The filing reports a definitive agreement signed on November 24, 2015, regarding a significant financing transaction.
Key Financial Metrics and Transaction Details
This filing does not contain standard financial statements (revenue, profit, cash flow, or margins) for a specific reporting period. Instead, it details a capital raise transaction with the following terms:
- Investor: Splendid Days Limited, a wholly-owned subsidiary of Ark Pacific Special Opportunities Fund I, L.P.
- Instrument: 12% senior secured convertible bonds (Notes) and warrants.
- Principal Amount (Notes): US$40,050,000.
- Warrant Amount: US$9,950,000.
- Interest Rate: 12% per year, payable upon redemption.
- Maturity: Due in 2018, with an option for the Investor to extend for two years.
- Conversion Terms: Notes are convertible into ADSs at initial prices of US$2.6, US$5.2, and US$7.8 per ADS across three tranches.
- Ownership Cap: Conversion is restricted if it would cause the Investor to hold more than 20% of the Company's outstanding shares.
Material Changes
The filing does not provide comparative financial data against prior periods. The material change reported is the execution of the definitive agreement for the issuance of the Notes and warrants, subject to customary closing conditions.
Outlook, Risks, and Management Commentary
Management Commentary: The Company describes itself as an operator of proprietary MMO and mobile games (including Firefall and Song of Knights) and engages in mobile advertising and app education. It also holds a joint venture with Shanghai ZTE for home entertainment set-top boxes.
Risks and Contingencies: The filing includes a Safe Harbor statement noting that forward-looking statements are subject to risks, including:
- Political and economic policies of the Chinese government.
- Regulations governing the online game industry and Internet content providers.
- Intensified government regulation of Internet cafes.
- Ability to retain players and license or develop appealing games.
- Competitive market conditions and changing consumer preferences.
Investor Verification Checklist
- Verify the closing of the transaction and receipt of the US$40,050,000 principal amount.
- Monitor the Company's share count to assess potential dilution from the conversion of Notes and warrants.
- Review the Company's ability to service the 12% interest obligation upon redemption.
- Assess the impact of Chinese regulatory changes on the Company's core gaming and advertising businesses.
- Confirm the status of the joint venture with Shanghai ZTE.