Business Context and Reporting Period
The9 Limited, a Chinese online game developer and operator, filed Form 6-K on December 28, 2015. The filing discloses unaudited financial information for the six months ended June 30, 2015, in compliance with NASDAQ Rule 5250(c)(2). The company operates proprietary games such as Firefall and Song of Knights and engages in mobile advertising and app education.
Key Financial Metrics (Six Months Ended June 30, 2015)
| Metric | 2015 (RMB) | 2015 (US$) | 2014 (RMB) |
|---|---|---|---|
| Net Revenues | 24,307,378 | 3,920,545 | 27,420,245 |
| Gross Loss | (10,380,078) | (1,674,206) | (14,285,975) |
| Loss from Operations | (135,247,721) | (21,814,149) | (167,242,310) |
| Net Loss | (136,559,821) | (22,025,778) | (153,959,510) |
| Net Loss Attributable to Holders of Ordinary Shares | (150,775,259) | (24,318,591) | (141,912,767) |
| Cash and Cash Equivalents (as of June 30, 2015) | 89,326,020 | 14,407,423 | 181,482,300 (Dec 31, 2014) |
| Total Assets (as of June 30, 2015) | 407,424,896 | 65,713,693 | 517,330,710 (Dec 31, 2014) |
| Total Liabilities (as of June 30, 2015) | 341,517,438 | 55,083,458 | 320,945,335 (Dec 31, 2014) |
The filing does not provide a clear value for operating cash flow or specific debt maturities beyond the new convertible notes described in recent developments.
Material Changes Versus Prior Period
- Revenue Decline: Net revenues decreased by approximately 11.4% year-over-year, dropping from RMB 27.4 million to RMB 24.3 million.
- Operating Loss Improvement: Despite revenue declines, the loss from operations narrowed significantly from RMB 167.2 million to RMB 135.2 million, primarily due to a RMB 9.4 million gain on the disposal of equity investees in 2014 which was absent in 2015, offset by lower operating expenses in some categories and higher impairment charges in 2014.
- Liquidity Reduction: Cash and cash equivalents fell by roughly 50.8%, from RMB 181.5 million at year-end 2014 to RMB 89.3 million at mid-year 2015.
- Equity Position: Total shareholders' equity turned negative, moving from RMB 98.0 million in 2014 to a deficit of RMB 50.5 million in 2015, driven by accumulated losses and accretion on redeemable noncontrolling interest.
Guidance, Outlook, and Recent Developments
The filing contains no specific financial guidance or quantitative outlook for future periods. However, it details significant strategic developments:
- Debt Financing: In November 2015, The9 entered into an agreement to issue US$40.05 million in 12% senior secured convertible notes due in 2018, along with warrants valued at US$9.95 million. The transaction closed in December 2015.
- Strategic Licensing: The company's joint venture, Oriental Shiny Star Limited, secured an exclusive five-year license to publish "Cross Fire 2" in mainland China. This involved an upfront payment of US$50 million and potential milestone payments totaling US$450 million.
- New Joint Venture: In December 2015, The9 formed a joint venture with Youku Tudou Inc. to engage in online game development, movie production, and network television series.
- Risks: The company highlights risks related to Chinese government regulations, the ability to retain players, and the competitive market for online games.
Investor Verification Checklist
- Verify the impact of the US$50 million upfront payment for "Cross Fire 2" on the company's remaining liquidity and cash runway.
- Confirm the terms and conversion triggers of the US$40.05 million convertible notes issued in December 2015.
- Assess the sustainability of the revenue decline trend and the company's ability to monetize new titles like "Cross Fire 2."
- Review the status of the joint venture with Youku Tudou Inc. and its projected contribution to future revenue streams.
- Examine the composition of "Other payables and accruals" and "Amounts due to related parties" to understand potential related-party transaction risks.