The9 Limited (Nasdaq: NCTY) — Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a separate 2019 fourth-quarter filing; quarterly results are not clearly provided in the filing text. Financial statements are prepared under U.S. GAAP. Amounts below are in RMB unless otherwise noted.
Business context
The9 primarily developed and operated online games, but its gaming business contracted sharply as games and licensing agreements ended. In 2019 it pursued an electric-vehicle joint venture with Faraday Future (F&F), which did not progress as planned. The company said it continued its gaming business while seeking an alternative business focus.
Key financial metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | RMB 0.343 million (US$49,000) | RMB 17.492 million |
| Gross profit (loss) | RMB (1.001) million | RMB 0.996 million |
| Operating loss | RMB (163.717) million | RMB (104.765) million |
| Net loss | RMB (196.169) million (US$28.178 million) | RMB (239.285) million |
| Net loss attributable to ordinary shareholders | RMB (190.623) million; RMB (1.79) per share | RMB (258.012) million; RMB (4.15) per share |
| Operating cash flow | RMB (54.175) million (US$7.782 million) | RMB (101.201) million |
| Cash and cash equivalents at year-end | RMB 10.113 million (US$1.453 million) | RMB 4.256 million |
| Total assets | RMB 181.459 million | RMB 164.687 million |
| Current liabilities | RMB 1,058.083 million | RMB 908.424 million |
| Shareholders’ equity (deficit) | RMB (1,231.922) million | RMB (1,084.811) million |
Revenue fell 98.0%; online-game revenue declined to RMB 0.304 million. Cost of revenue exceeded net revenue, producing a gross loss; the resulting gross margin was approximately negative 293%. Operating expenses rose 53.5% to RMB 162.746 million, including RMB 34.881 million of impairment on other long-lived assets, primarily the F&F joint-venture deposit. The filing reports no income tax expense for 2019.
Cash used in investing activities was RMB 60.879 million provided, primarily from investment disposals and sale-related proceeds, partly offset by the RMB 34.881 million F&F deposit. Financing activities provided RMB 40.923 million, including loans from related parties and other loans. These sources supported a modest year-over-year increase in cash, despite continued operating cash burn.
At December 31, 2019, net current liabilities were approximately RMB 903.6 million, accumulated deficit was RMB 3,410.9 million, and total current liabilities exceeded total assets by approximately RMB 876.6 million. Short-term borrowings were RMB 117.526 million and the convertible-note carrying amount, including interest, was RMB 414.128 million. Operating lease liabilities were RMB 9.659 million.
Material changes and unusual items
- Revenue plunged from RMB 17.492 million in 2018 to RMB 0.343 million in 2019. Management cited the IPTV accounting change from principal to agent, expired or terminated licensing contracts, and cessation of games.
- Operating loss widened despite lower product-development and sales-and-marketing costs, as general and administrative expenses increased and the company recorded the F&F deposit impairment.
- Net loss narrowed from RMB 239.285 million to RMB 196.169 million. Interest expense declined to RMB 34.502 million from RMB 104.777 million, largely reflecting different accounting for the overdue notes; this did not remove the underlying debt burden.
- The company agreed to sell three subsidiaries holding Shanghai office properties for RMB 493 million. The transaction closed in February 2020; subsequent to year-end, the company reported receiving 90% of proceeds, repaying the entrusted bank loan and paying approximately US$4.8 million to the convertible-note holder.
- 2019 cash flow and earnings included significant non-cash charges and asset-disposal proceeds. Other income included a litigation-fee refund; disposal gains and impairments also affected reported results.
Outlook, risks and contingencies
- Going concern: The auditor issued an unmodified opinion with an explanatory paragraph raising substantial doubt about the company’s ability to continue as a going concern. Management’s plans included potential financing, cost controls, new games and using property-sale proceeds to repay debt. The filing says failure to obtain capital could require asset sales, a sale of the company or cessation of operations.
- Debt and liquidity: The 2015 secured convertible notes were overdue. As of the report date, the outstanding balance was US$55.5 million; management planned to use sale proceeds toward repayment. The notes bore 12% interest through February 21, 2020, with US$6.6 million continuing at 14% thereafter under the settlement amendments. A separate pledged-share loan was in default; the lender could foreclose on pledged L&A shares and seek any shortfall.
- F&F joint venture: The9 committed up to US$600 million in three installments and had paid a US$5 million deposit, which was fully impaired. It had not signed the vehicle-license agreement or fulfilled the first US$200 million installment obligation as of the report date. The agreements remained effective and could create substantial legal and funding exposure.
- Gaming pipeline: The company expected to launch CrossFire New Mobile Game in the second half of 2020, subject to completion, approvals and licensing. The license-development period was extended through October 31, 2020. Audition was also under development; Pop Fashion had launched in China. No quantified revenue or earnings guidance was provided.
- Claims and investments: In April 2020, Inner Mongolia Culture Assets and Equity Exchange claimed RMB 57.5 million of principal and interest related to CrossFire development funding. The company also disclosed copyright claims totaling RMB 3.0 million, for which it accrued an amount, and continuing implementation of a settlement concerning Qihoo 360. It recognized RMB 6.0 million impairment on advances tied to unissued Telegram tokens.
- COVID-19 and regulation: Management cited potential disruption to game development, financing and the search for a new business focus. Other material risks include China’s evolving online-game rules, approvals and VIE contractual structure, currency controls, and difficulty accessing audit work papers in China.
- Listing and governance: Nasdaq notified the company in 2020 of deficiencies in minimum bid price and market value of listed securities; compliance deadlines were extended to November 16, 2020. Jun Zhu held approximately 86.7% of voting power through the dual-class structure, with 50 votes per Class B share versus one per Class A share.
Most important facts for investors to verify
- Whether the property-sale proceeds were sufficient and actually applied to repay the US$55.5 million convertible-note balance, and the current note terms, accrued interest and remaining debt.
- The status and enforceability of The9’s US$600 million F&F commitment, including any amendments, claims, or termination rights.
- Current cash, short-term obligations, net current liabilities and financing availability; the company had only RMB 10.1 million of cash at year-end and negative operating cash flow.
- Whether CrossFire New Mobile Game obtained required approvals, resolved the RMB 57.5 million funding claim, and launched successfully; no forecasted commercial returns are disclosed.
- Whether Nasdaq listing deficiencies were cured and whether the company remains listed.
- The effect of the going-concern uncertainty and China-related VIE and audit-access risks; the auditor’s report includes substantial-doubt language, and the auditor was not subject to PCAOB inspection in China.