The9 Limited — FY2012 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2012. This is an annual report, not a standalone fourth-quarter filing; the supplied filing text does not provide clear Q4-only financial results. Financial statements are audited and prepared under U.S. GAAP. RMB is the reporting currency; U.S. dollar figures are convenience translations.
Business context and results
The9 develops and operates online, mobile, web, social and TV games, primarily in China. Following the expiration of its World of Warcraft (WoW) license in 2009, the company has sought to replace that revenue through licensed and proprietary games, mobile platforms and game development. Its PRC business relies heavily on variable interest entities (VIEs); Shanghai IT and Huopu Cloud together generated 94.6% of consolidated net revenue in 2012.
Key financial metrics
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | RMB 163.6m (US$26.3m) | RMB 112.5m |
| Net revenue, after sales taxes | RMB 154.4m | RMB 106.4m |
| Gross profit | RMB 85.0m; 55.1% of net revenue | RMB 67.3m; 63.2% |
| Operating loss | RMB 592.4m (US$95.1m) | RMB 384.0m |
| Net loss | RMB 559.8m (US$89.9m) | RMB 313.2m |
| Net loss attributable to ordinary shareholders | RMB 514.0m; RMB 20.98 per share | RMB 284.3m; RMB 11.39 per share |
| Cash and cash equivalents at year-end | RMB 554.3m (US$89.0m) | RMB 1,071.7m |
| Cash flow from operations | Use of RMB 489.2m (US$78.5m) | Use of RMB 270.9m |
| Total assets / total liabilities / total equity | RMB 1,112.3m / RMB 363.1m / RMB 749.2m | RMB 1,628.9m / RMB 377.1m / RMB 1,251.8m |
| Current assets / current liabilities | RMB 664.6m / RMB 317.7m | RMB 1,168.7m / RMB 311.5m |
Revenue increased 45.4%, while net loss attributable to ordinary shareholders widened 80.8%. Gross margin declined as cost of services rose faster than net revenue. Operating expenses increased 42.0% to RMB 677.5m, including product development of RMB 301.5m and sales and marketing of RMB 187.0m. The filing does not provide a clear conventional borrowings balance; reported liabilities include long-term accounts payable of RMB 39.9m and a RMB 170.0m WoW game-points refund liability.
Material changes and unusual items
- PC online game revenue rose to RMB 131.0m from RMB 94.6m, despite average quarterly active users falling to 2.28m from 3.98m and paying users declining to 102,293 from 113,507. Average quarterly revenue per paying user increased to RMB 299 from RMB 215.
- TV game revenue increased to RMB 18.5m from RMB 9.2m. The company attributed growth to platform expansion and increased paying users and revenue per payer.
- Product development spending rose 42.1%; sales and marketing spending more than doubled, rising 106.7%, partly for ShenXianZhuan promotion and preparation for Firefall and Planetside 2.
- Operating cash use increased by RMB 218.3m year over year, and year-end cash fell by RMB 517.4m. Management said available cash was sufficient for obligations and operating needs over the coming 12 months, with discretionary spending subject to active management.
- FY2012 included a RMB 15.7m gain related to the 2011 OpenFeint investment disposal, a RMB 18.1m loss from restructuring and deconsolidating Fire Rain and Wanyouyl, and a RMB 3.2m investment impairment. FY2011 included RMB 26.0m of other operating income from extinguishment of part of the WoW refund obligation.
- The RMB 170.0m liability for activated but unconsumed WoW points remained outstanding at year-end; management stated it expected legal release in 2029 under current law. A refund agent was also due to return advances in installments.
Outlook, risks and contingencies
- Management expected open beta testing or launches in 2013 for Firefall, Planetside 2 and Qiji 2, and anticipated marketing costs associated with launches. These are forward-looking plans, not assurances of commercial success.
- The filing identifies continuing losses and operating cash outflows, dependence on a limited portfolio of games, declining popularity of mature titles, and the challenge of producing successful new games as major risks. Management’s going-concern assessment relies in part on planned 2013 game launches and control of discretionary spending.
- The company depends on third-party game licenses and distribution relationships. Its SUN license was scheduled to terminate in June 2013; several other licenses had expired or been terminated, and exclusive SOE licenses for certain Korean games were terminated in October 2012.
- PRC restrictions on foreign ownership require contractual VIE arrangements rather than direct ownership of key licensed operations. The filing warns that regulatory interpretations or enforcement could invalidate arrangements, disrupt operations or prevent consolidation of VIE results.
- Related-party and other commitments include RMB 32.0m paid to Shanghai Shenhua for game promotion and EUR 2.7m and EUR 3.1m paid for Anelka and Drogba endorsements. The CEO was also a major Shenhua shareholder. The company disclosed RMB 22.3m of outstanding cash advances to related parties and noted PRC restrictions on unlicensed company-to-company lending.
- Legal matters included a font-infringement judgment requiring aggregate compensation of RMB 2.2m, paid in September 2012, and a Maradona image-use lawsuit for which the company had accrued RMB 2.0m and considered a greater award remote.
- Other risks include RMB conversion and remittance controls, foreign-exchange exposure without hedging, game approval and censorship requirements, and the company’s stated belief that it was a PFIC for U.S. tax purposes in 2012.
Management reported effective disclosure controls and internal control over financial reporting as of December 31, 2012; the auditor gave an unqualified opinion on the financial statements and internal controls. The filing also cautions that the PRC-based auditor was not then subject to PCAOB inspection.
Important facts for investors to verify
- Whether planned 2013 releases achieved launch, regulatory approval and meaningful paying-user adoption, particularly Firefall, Planetside 2 and Qiji 2.
- Whether operating cash use and the cash balance improved after FY2012, and how management’s 12-month liquidity assessment compares with actual cash needs and available funding.
- The terms, collectability and timing of the RMB 170.0m WoW refund liability and the remaining agent advance receivable.
- The enforceability and regulatory standing of the VIE arrangements, licenses and related-party transactions, including outstanding advances.
- The complete schedule of financial obligations, including game-license payments, guarantees, lease commitments and any borrowings not clearly quantified in the supplied filing text.