The9 Limited — FY2017 Form 20-F
Reporting period: Year ended December 31, 2017. This is an annual filing, not a standalone 2017 fourth-quarter report; quarterly results are not clearly provided. Financial figures below are in RMB unless otherwise noted. The company reports under U.S. GAAP.
Business context
The9 develops and operates online games, with substantially all revenue from online game services. It operates in China partly through Shanghai IT, a variable interest entity controlled by contractual arrangements rather than direct ownership. The company was shifting toward proprietary mobile games while winding down or losing certain older game operations. Blockchain-related services were announced as a new initiative in January 2018.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | RMB73.2 million (US$11.3 million) | RMB56.3 million |
| Net revenue | RMB73.1 million | RMB56.2 million |
| Gross profit (margin) | RMB49.4 million (67.5%) | RMB7.7 million (13.7%) |
| Operating loss | RMB113.3 million | RMB295.6 million |
| Net loss | RMB112.1 million | RMB667.1 million |
| Net loss attributable to ordinary shareholders | RMB175.3 million; RMB5.24 per share | RMB676.7 million; RMB28.34 per share |
| Cash used in operating activities | RMB86.7 million | RMB181.0 million |
| Cash and cash equivalents at year-end | RMB142.6 million | RMB38.9 million |
| Total assets | RMB323.1 million | RMB350.9 million |
| Current liabilities | RMB819.4 million | RMB573.7 million |
| Total shareholders’ deficit | RMB802.4 million | RMB702.1 million |
The gross margin is calculated from reported net revenue and gross profit. The cash increase chiefly reflected a US$25 million settlement payment from an investee, not positive operating cash generation. Cash used in investing activities was RMB161.9 million provided, while financing activities provided RMB44.1 million.
At year-end, current liabilities exceeded current assets by approximately RMB636.3 million; the company also disclosed an accumulated deficit of RMB3,016.0 million. Debt included RMB260.6 million of convertible notes and RMB108.7 million of short-term borrowings. Interest expense was RMB83.9 million, up from RMB56.5 million. Equity was negative, and the auditor reported substantial doubt about the company’s ability to continue as a going concern.
Changes versus the prior year
- Revenue rose 30.1%; online-game services rose 47.4%, while other revenue fell 78.7%.
- Gross profit increased as revenue grew and cost of revenue fell 51.0%, partly because prior impairment reduced subsequent amortization.
- Operating expenses fell 46.9%, including lower product development and sales and marketing spending, alongside cost reductions.
- Net loss narrowed substantially. The comparison is affected by the RMB244.8 million available-for-sale investment impairment recorded in 2016, as well as 2017’s RMB60.5 million gain from recovery of an equity investment in excess of cost and RMB19.2 million foreign-exchange gain.
- Cash used in operations improved but remained negative. Cash increased mainly due to the investee settlement.
Outlook, risks, and unusual items
- Management said it expected available cash, potential financing, new-game launches, and cost controls to cover anticipated operating needs for 12 months after the filing date; it cautioned that financing and cost-control outcomes were not assured. The auditor’s going-concern paragraph remains an important qualification.
- The company expected to launch CrossFire New Mobile Game in 2019 and planned online testing of other mobile games before mid-2018. The CrossFire game had an exclusive China publisher and RMB57.5 million raised for development; the company aimed to raise a further RMB100 million and agreed to share certain game revenues with funders.
- In 2017, Smilegate paid The9 US$25 million under a settlement following termination of the CrossFire 2 license and related arrangements. The filing reports RMB60.5 million as recovery in excess of investment cost. Firefall licensing-fee recognition also materially contributed to 2017 revenue; the filing gives differing amounts for related Firefall revenue components, so the precise reconciliation should be checked in the financial statement notes.
- A RMB77.1 million loan secured by L&A shares was in default after the share price fell below the collateral threshold; the lender could foreclose and seek any shortfall. The RMB31.6 million entrusted loan, with accrued interest, was reclassified as current and secured by the Shanghai office building and land-use right.
- The US$40.05 million convertible notes bear 12% interest, were due to mature in 2018 subject to a holder option to extend, and are secured by specified China subsidiaries and the Shanghai office property. Their covenants and default/change-of-control provisions may constrain financing and operations.
- The company retained a RMB170.0 million liability for unconsumed World of Warcraft points, which management said would not legally expire until 2029 absent a new refund announcement.
- The VIE structure, PRC licensing and foreign-ownership rules, and enforcement of contractual control arrangements create material regulatory and operational uncertainty. The filing also identifies ongoing litigation with Qihoo 360 affiliates over System Link and Firefall.
- Nasdaq listing deficiencies and potential delisting were disclosed after year-end. The 2017 ADS price ranged from US$0.63 to US$1.36. A planned US$30 million share issuance to AP Fund and Incsight had not closed as of the filing; redemption rights could require cash repayment under specified triggers.
Important facts for investors to verify
- Whether the company can fund operations and meet near-term maturities, and the latest status of the going-concern assessment, pledged-share loan default, and convertible-note repayment or extension.
- How much 2017 revenue and cash generation depended on Firefall license-fee recognition and the one-time Smilegate settlement, including reconciliation of the disclosed licensing figures.
- Progress, regulatory approvals, funding, launch timing, and commercial performance of CrossFire New Mobile Game and other planned titles.
- Status and terms of the uncompleted share purchase agreements, investor redemption rights, dilution, and related-party loans.
- Current Nasdaq listing compliance and the consequences of any delisting, alongside the enforceability and regulatory standing of the VIE arrangements.