Business context and reporting period
The9 Limited’s Form 20-F reports on the fiscal year ended December 31, 2021; it does not provide standalone fourth-quarter results. The Cayman Islands holding company shifted its focus from online games to cryptocurrency mining and NFTSTAR, its NFT trading and community platform. Cryptocurrency mining began in February 2021 and generated 98.7% of full-year revenue. The company says it significantly reduced China operations and moved mining activity outside China from June 2021.
Key financial metrics
Amounts are in RMB unless otherwise indicated. The filing’s U.S. dollar translations use RMB6.3726 per US$1.
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | RMB135.9 million (US$21.3 million) | RMB0.6 million |
| Gross profit (margin) | RMB47.8 million (35.2%) | RMB0.2 million gross loss |
| Operating income (loss) | RMB(316.8) million | RMB336.7 million |
| Net income (loss) | RMB(416.8) million (US$65.4 million) | RMB393.4 million |
| Net loss attributable to ordinary shareholders | RMB(411.2) million | RMB396.7 million net income |
| Operating cash flow | RMB(687.7) million (US$107.9 million) | RMB(106.3) million |
| Investing cash flow | RMB(141.1) million | RMB438.3 million |
| Financing cash flow | RMB1,226.6 million | RMB(310.7) million |
| Cash and cash equivalents at year-end | RMB428.4 million (US$67.2 million) | RMB31.7 million |
| Current assets / current liabilities | RMB1,050.5 million / RMB544.3 million | RMB42.3 million / RMB364.4 million |
| Total assets / total liabilities | RMB1,310.3 million / RMB546.9 million | RMB48.4 million / RMB366.8 million |
- FY2021 operating expenses included RMB293.2 million in general and administrative expense, including RMB150.2 million of share-based compensation; RMB22.0 million in sales and marketing; RMB50.9 million of cryptocurrency impairment; and RMB11.6 million of equipment impairment.
- Interest expense was RMB119.2 million, partly offset by a RMB62.2 million gain from changes in the fair value of the convertible-note conversion feature. The company also recorded RMB15.0 million of gains on disposal of subsidiaries and RMB17.2 million of gains on other investments.
- Year-end convertible notes had a reported net carrying amount of RMB92.8 million, alongside a RMB51.8 million conversion-feature derivative liability and RMB0.9 million interest payable. The company separately disclosed approximately US$16 million of remaining convertible-note principal as of March 30, 2022.
- The company reported RMB506.2 million of net current assets at year-end, but also had an accumulated deficit of RMB3,403.5 million. No dividends are expected in the foreseeable future.
Material changes versus the prior comparable period
- Revenue rose from RMB0.6 million in 2020 as the company launched cryptocurrency mining; mining revenue was RMB134.1 million in 2021. Online game services and other revenue were RMB1.8 million.
- The company moved from 2020 net income of RMB393.4 million to a 2021 net loss of RMB416.8 million. The 2020 result included a RMB475.6 million gain on subsidiary disposals and other one-time gains; 2021 losses reflected higher overhead and share-based compensation, crypto and equipment impairments, and convertible-note interest.
- Operating cash outflow increased to RMB687.7 million from RMB106.3 million. Financing provided RMB1,226.6 million in 2021, mainly through share and warrant issuance and convertible notes; the 2020 investing inflow was largely proceeds from subsidiary disposals.
- Year-end cash increased to RMB428.4 million, while outstanding ordinary shares rose to 691.4 million from 260.0 million at December 31, 2020. The company’s Class B shares carry 100 votes each, following a December 2021 change from 50 votes.
Outlook, management commentary, risks and unusual items
- Outlook and funding: The company gave no specific revenue or earnings guidance. It estimated that approximately US$250 million might be needed to meet its mining growth goal, and said it may fund operations through additional financing and Bitcoin sales. Management stated it was not aware of obligations it could not meet over the next 12 months plus a day, while also warning that continued losses and negative operating cash flow could threaten its ability to continue as a going concern.
- Mining and crypto risks: Results depend on cryptocurrency prices, mining difficulty, machine and electricity costs, available hosting capacity, regulation, and secure custody of digital assets. China’s 2021 restrictions prohibited new virtual-currency mining projects and called for orderly withdrawal of existing projects. The company also cited risks from cybersecurity incidents, exchange failures, network changes and Bitcoin halving.
- Investment and commitments: The company paid approximately US$74 million toward an US$82.8 million purchase of 24,000 Antminer S19j machines by the report date. It had also paid US$15.4 million under NFTSTAR star-license agreements and disclosed US$44.8 million of remaining payment commitments at December 31, 2021.
- Russia and subsequent developments: Russia operations contributed approximately 0.06% of 2021 revenue. After the U.S. Treasury sanctioned BitRiver in April 2022, the company said it planned to terminate the partnership and transfer, dispose of or re-host affected machines. It warned that disruption could materially affect results. In April 2022, it negotiated an approximately US$8.6 million settlement of outstanding claims related to earlier convertible notes.
- Other unusual items: A RMB170.0 million liability for unconsumed World of Warcraft game points remains on the balance sheet; the company expects it may not be legally released until 2029. It also recorded material share-based compensation and a substantial noncash derivative gain relating to convertible notes.
- Controls and audit: The 2021 financial statements received an unqualified audit opinion, but the auditor issued an adverse opinion on internal control over financial reporting. Material weaknesses involved untimely period-end closing controls and insufficient personnel with U.S. GAAP and SEC reporting expertise. The company said remediation was underway. Its auditor changed from Grant Thornton to RBSM in August 2021.
- Structure and regulation: Investors own shares in a Cayman Islands holding company, not equity in the China variable interest entity, which is consolidated through contractual arrangements. The company disclosed uncertainty around enforceability of those arrangements and evolving Chinese rules for overseas offerings, cybersecurity, data and blockchain-related business.
Important facts for investors to verify
- Reconcile the year-end convertible-note balance, derivative liability and the approximately US$16 million principal reported outstanding in March 2022, including subsequent repayments, conversions and settlement terms.
- Confirm the number, location, operating status and ownership of mining machines, particularly machines affected by China’s restrictions, BitRiver sanctions and delays in planned hosting facilities.
- Reconcile company disclosures of approximately 466 Bitcoins mined and 426 held with the audited note reporting 393 Bitcoins held at December 31, 2021; verify custody, pledges and subsequent sales.
- Assess whether liquidity and planned financing or Bitcoin sales can cover operating cash needs, machine purchases, convertible debt and NFTSTAR’s remaining US$44.8 million license commitments.
- Track remediation of the material weaknesses, the timing and scale of share-based compensation, and potential dilution from warrants, equity facilities and convertible notes.
- Review progress and conditions of the approximately US$8.6 million settlement, remaining World of Warcraft refund liability, and regulatory exposure affecting the VIE, overseas listings and digital-asset operations.