The9 Limited — FY2014 Form 20-F
Period: Fiscal year ended December 31, 2014. This is an annual report, not a standalone fourth-quarter filing; the supplied filing does not provide clear Q4-only financial results. Financial statements use U.S. GAAP. Amounts below are in RMB unless otherwise stated.
Business context
The9 develops and operates online, mobile, web, social and TV games, primarily in China. Most revenue came from online game services. Firefall launched in North America and Europe in 2014; a China launch was planned for the second half of 2015. The company relies on contractual arrangements with PRC variable interest entities (VIEs) for key licensed online-game operations.
Key financial metrics
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | RMB64.8m (US$10.5m) | RMB106.6m |
| Net revenue, after sales taxes | RMB64.3m (US$10.4m) | RMB104.8m |
| Gross profit (loss) | (RMB21.5m); margin about (33.5%) | (RMB3.0m); margin about (2.9%) |
| Operating loss | RMB160.8m (US$25.9m) | RMB530.2m |
| Net loss | RMB128.9m (US$20.8m) | RMB562.9m |
| Net loss attributable to ordinary shareholders | RMB107.7m (US$17.4m); RMB4.65 per share | RMB526.3m; RMB22.71 per share |
| Cash and cash equivalents at year-end | RMB181.5m (US$29.2m) | RMB157.0m |
| Operating cash flow | Use of RMB269.1m (US$43.4m) | Use of RMB357.6m |
| Total assets / total liabilities | RMB517.3m / RMB320.9m | RMB546.7m / RMB356.5m |
| Total equity | RMB64.9m (US$10.5m) | RMB190.1m |
| Net current position | Current liabilities exceeded current assets by RMB40.7m (US$6.6m) | Deficit of RMB112.0m |
| Borrowings | No bank or other borrowings outstanding | No bank or other borrowings outstanding |
There was no income tax expense in FY2014. The filing does not present a conventional operating margin as a headline metric; operating loss was substantial relative to revenue. Debt and liquidity figures should be considered alongside the RMB170.0m (US$27.4m) current liability for unconsumed World of Warcraft game points.
Changes versus FY2013
- Revenue fell 39.2%, mainly as online-game services revenue declined 41.7% to RMB55.4m. PC-game revenue fell to RMB33.5m; average quarterly active users declined to 983,805 from 2,095,890, although revenue per paying user increased.
- Gross loss widened to RMB21.5m from RMB3.0m as lower revenue did not cover relatively fixed operating costs.
- Operating expenses fell 73.6% to RMB139.4m, reflecting lower development, marketing and administrative costs and a RMB165.4m gain on disposal of subsidiaries. Excluding that disposal gain, the expense and loss picture remains materially weaker than revenue alone may suggest.
- Net loss narrowed substantially, helped by the subsidiary disposal gain and a RMB17.9m reversal of a prior receivable allowance. These are unusual items and should not be treated as recurring operating performance.
- Cash increased RMB24.5m during the year despite a RMB269.1m operating cash outflow, primarily because of asset-sale proceeds and investment funding. Investing activities provided RMB197.8m; financing activities provided RMB100.2m, including the Red 5 investment.
- Equity decreased to RMB64.9m. A RMB131.5m redeemable noncontrolling interest was recorded in temporary equity following Red 5’s preferred-share financing.
Outlook, commentary and risks
- Management planned to launch Firefall in China and several mobile games in 2015, and said development spending could be controlled. It believed available resources were sufficient for the following 12 months, but acknowledged continued operating losses, cash outflows and net current liabilities were possible.
- In February 2015, Shanghai IT received a one-year China Merchants Bank credit-facility commitment of up to RMB200m; no funds had been drawn as of the filing date. This is a commitment, not cash already available on the balance sheet.
- The Firefall China publishing agreement with 50%-owned System Link contemplated at least US$160m of license fees and royalties over five years. The amount is expected under the agreement and depends on performance and collection; it is not FY2014 revenue. The9 also committed US$6m in January 2015 and could be required to contribute a further US$4m.
- Major risks include dependence on a small number of games, declining user activity and uncertain market acceptance of new titles; competition and game-license dependence; and the possibility that game launches or approvals are delayed or unsuccessful.
- The PRC VIE structure, regulatory uncertainty and reliance on Shanghai IT’s licenses create risks to operational control and consolidation. PRC currency controls can also constrain cash transfers. The VIEs generated 66.4% of FY2014 revenue and represented 72.2% of consolidated liabilities.
- The remaining WoW refund liability was RMB170.0m; management stated it expected legal release from the obligation in 2029 under current law. The company reported no material litigation other than disclosed matters: a Maradona settlement for RMB3.3m in February 2015 and a separate advertising-fee settlement of RMB1.4m in January 2015.
- The company believed it was a passive foreign investment company (PFIC) for U.S. tax purposes in 2014. Its year-end equity of US$10.5m was only slightly above Nasdaq’s cited US$10m equity standard. Management reported effective disclosure controls and internal control over financial reporting; no auditor attestation was included because the company was a non-accelerated filer.
Important facts for investors to verify
- Whether the planned Firefall China launch occurred, and whether it generated meaningful revenue, paying users and cash receipts; verify the conditions and collectability behind the System Link agreement’s stated minimum payments.
- Cash runway and subsequent operating cash flow, including whether the RMB200m credit facility was drawn and on what terms.
- How much of the FY2014 loss improvement came from the RMB165.4m subsidiary-disposal gain, the RMB17.9m allowance reversal and other disposal proceeds, versus recurring operations.
- The status, expected payment timing and legal basis of the RMB170.0m WoW refund liability, as well as the planned RMB10m System Link contribution.
- The basis for reported share counts: the cover reports 28,783,929 shares at year-end, while the balance sheet reports 23,201,601 issued and outstanding; the filing also describes depositary shares reserved for future issuance.
- Nasdaq continued-listing compliance, given year-end equity of US$10.5m, and the effects of Red 5’s redeemable preferred-share terms, including a possible redemption at 200% of issue price beginning in 2017.