The9 LTD annual report, Q4 FY2022

The9 Limited (Nasdaq: NCTY) — FY2022 Form 20-F

Reporting period: Fiscal year ended December 31, 2022. This is an annual report, not a standalone fourth-quarter filing; the supplied filing text does not provide separate Q4 results. Financial statements are prepared under U.S. GAAP and reported primarily in RMB.

Business context

The9 is a Cayman Islands holding company that has shifted from online games to global blockchain activities, principally Bitcoin mining and its NFTSTAR platform. In 2022, cryptocurrency mining produced 85.6% of revenue. The company says Chinese mainland operations are now insignificant; mining operations are conducted outside mainland China. It consolidates Shanghai IT, a Chinese variable interest entity, through contractual arrangements rather than equity ownership.

Financial performance and liquidity

MetricFY2022FY2021
RevenueRMB118.9 million (US$17.2 million)RMB135.9 million
Gross profit (loss)(RMB65.7 million); gross margin (55.3%)RMB47.8 million; gross margin 35.2%
Operating income (loss)(RMB961.6 million)(RMB316.8 million)
Net income (loss)(RMB979.5 million) (US$142.0 million)(RMB416.8 million)
Net cash used in operating activitiesRMB154.7 million (US$22.4 million)RMB687.7 million
Cash and cash equivalents at year-endRMB58.1 million (US$8.4 million)RMB428.4 million
Working capitalDeficit of RMB166.5 million (US$24.1 million)Surplus of RMB506.2 million
Total assets / total liabilitiesRMB599.1 million / RMB571.6 millionRMB1,310.3 million / RMB546.9 million
  • Revenue declined 12.5%, principally attributed to the lower Bitcoin price. Mining revenue fell from RMB134.1 million to RMB101.8 million; NFT and other revenue rose to RMB17.1 million combined.
  • Total cost of revenue rose 109.7% to RMB184.6 million, largely due to depreciation of mining machines. Higher costs drove the shift from positive gross profit to a gross loss.
  • Significant 2022 operating charges included RMB176.9 million of equipment and long-lived asset impairment, RMB159.2 million impairment of advances and other assets, and RMB58.6 million cryptocurrency impairment. Sales and marketing expense increased to RMB118.6 million, primarily due to sports-star royalties; general and administrative expense rose to RMB376.4 million, including higher share-based compensation.
  • Investing cash outflow was RMB248.8 million, including RMB247.3 million for property, equipment and software. Financing provided RMB33.0 million. Cash fell RMB370.4 million during the year.
  • Year-end current liabilities were RMB564.2 million versus current assets of RMB397.7 million. Convertible notes had a net carrying value of RMB61.0 million; a separate conversion-feature derivative liability was RMB51.8 million. Operating lease liabilities totaled RMB13.2 million. The filing also reports RMB11.5 million owed on interest-free loans from the CEO.

Material changes, outlook and risks

  • Results deteriorated from 2021: revenue declined, mining costs increased, and the company recorded a much larger operating and net loss. FY2020 net income was RMB393.4 million, driven principally by a one-time gain on disposal of subsidiaries, and is not a comparable indication of ongoing profitability.
  • The auditor included a going-concern paragraph. Recurring losses, negative operating cash flow, working-capital deficit and accumulated deficit of RMB4,378.3 million raise substantial doubt about the company’s ability to continue as a going concern. Management cites possible asset sales, additional financing and cost controls, but there is no assurance these measures will succeed. No numerical earnings or revenue guidance is provided.
  • The company paid US$17.7 million under NFT licenses and disclosed a further US$37.8 million payment commitment. It says it has been reducing NFT cash outflows. A full impairment was recorded on sports-star prepayments following uncertainty in NFT business development.
  • Management reported that Russia accounted for approximately 8.1% of 2022 revenue. After OFAC sanctions designated BitRiver, The9 decided to terminate the partnership and expected to wind operations down by the end of 2023; relocation or disposal of machines may disrupt mining.
  • Bitcoin price, mining difficulty, energy costs, machine depreciation, custody and exchange risks, and evolving crypto/NFT regulation may materially affect results. Chinese restrictions on virtual-currency mining and uncertainty around the VIE structure and cross-border cash transfers are additional risks.
  • Cash transferability and access to subsidiary funds matter: no subsidiaries paid dividends to the Cayman holding company in 2020–2022. Mainland rules restrict distributions, and RMB70.4 million of net assets was disclosed as restricted at year-end 2022.
  • Internal controls were not effective at December 31, 2022. The reported significant deficiency concerned untimely period-end closing at certain subsidiaries, especially abroad; management proposed stronger subsidiary financial management and reporting processes. The auditor did not express an opinion on internal-control effectiveness.
  • Other notable exposures include RMB170.0 million of legacy World of Warcraft game-point refund liability, which management says may remain until 2029; a Skychain dispute with a CAD2 million summary judgment being enforced; and a claim against bankrupt Compute North that was stayed during bankruptcy proceedings.

Important facts for investors to verify

  • Near-term liquidity, cash burn, financing availability and the assumptions behind management’s going-concern plans; reconcile reported debt, accrued interest and derivative liabilities, including subsequent note amendments and repayments.
  • Mining fleet deployment, operating uptime, electricity and hosting costs, impairment assumptions, Bitcoin holdings and pledges, and the financial effect of the BitRiver exit.
  • Whether NFTSTAR revenue and royalties can support its costs, the enforceability and remaining amounts of star-license commitments, and the recoverability of prepayments and other assets.
  • Progress in remediating the internal-control deficiency and the reliability of subsidiary-level reporting; review the auditor’s going-concern discussion and cryptocurrency-revenue critical audit matter.
  • Status of the WoW refund obligation, Skychain enforcement and Compute North bankruptcy claim, as well as any material changes to PRC filing, cybersecurity, VIE or cash-transfer requirements.
  • Potential dilution and governance concentration: 861.0 million ordinary shares were outstanding at year-end, with Class B shares carrying 100 votes each; Jun Zhu controlled approximately 62% of voting power as of March 31, 2023.