The9 Ltd

NASDAQ:NCTY

Earnings Call Transcript 2020-Q4

[Operator]

Good evening and welcome to The9 Limited 2020 Unaudited Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] The conference is being webcasted.

I would now like to turn the conference over to Connie Sun from The9 Limited IR Department. Please go ahead.

[Connie Sun, Investor Relations]

Thank you, operator. Good evening and welcome to The9 Limited 2020 financial results conference call. I’m Connie Sun from The9 Limited IR Department. First, before we start the presentation and the Q&A, we would like to remind you that this includes forward-looking statements, which are underlined by a number of risks and uncertainties and may not be relied in the future for various reasons. Information about general market condition is coming from a variety of sources outside of The9.

Next, let me now introduce the management team on the call [tonight]. [Indiscernible] shareholder of The9 Limited; Chris Shen, President of The9 Limited; George Lai, CFO of The9 Limited; and ZhiFang Cai, [CEO of NBTC Limited].

After our presentation, we will open the floor for the questions. Now, I will turn the call over to our CFO, George.

[George Lai, Chief Financial Officer]

Good day ladies and gentlemen. Thanks for participating in our discussion of The9 2020 financial results and our recent developments on the cryptocurrency mining business. For the year-ended December 31, 2020, net income attributable to holders of ordinary shares was [RMB397 million] or [US$60.8 million], compared to a net loss attributable to holders of ordinary shares amounted to RMB190.6 million or US$29.2 million for the year ended December 31, 2019.

The net profit of the year ended December 31, 2020 was mainly attributed to the gain on disposal of subsidiaries, which collectively held [indiscernible] and an office building located at Zhang Jiang, Shanghai.

Let's turn our focus to our recent development on the cryptocurrency mining business. In January 2021, we entered into a co-operation and investment agreement with several investors, including Mr. JianPing Kong in the cryptocurrency miningindustry in anticipation of developing our cryptocurrency mining business with the assistance of these investors.

We issued certain ordinary shares and warrants to the investors. The warrants are divided into four equal challenges, which are exercisable subject to the market capitalization of The9, ranging from US$100 million, US$300 million, US$500 million, and US$1 billion between certain time period.

In February 2021, NBTC limited, a wholly-owned subsidiary of The9, signed a strategic cooperation framework purchase agreement with Shenzhen MicroBT Electronics Technology Company Ltd., the manufacturer of WhatsMiner Bitcoin mining machines. We paid a deposit of US$1.4 million and obtained the right of first offer to purchase 5,000 WhatsMiner Bitcoin mining machines from MicroBT within one-year.

As of today, we have completed two batches of purchase and bought 922 WhatsMiner machines, with an approximate hash rate of 66PH/s. These WhatsMiner machines have already been deployed.

In March 2021, NBTC signed a Bitcoin mining machine purchase agreement with Bitmain Technologies Limited. Pursuant to the purchase agreement, we will purchase 24,000 AntminerS19j Bitcoin mining machines, which are scheduled to deliver starting from November 2021, for a total consideration of US$82.8 million payable by installments according to the agreed time schedule. The first installment of US$16.6 million has been paid.

In February 2021, we entered into purchase agreements with five Bitcoin mining machine owners to purchase Bitcoin mining machines by issuance of its ordinary shares. The9 issued an aggregate of 26.9 million ordinary shares, equivalent to 0.9 million ADSs at US$11.18 per ADS in exchange for 26,007 Bitcoin mining machines, with a total hash rate of approximately 549PH/S.

In February 2021, we signed six legally binding MOUs with six Bitcoin mining machine owners to purchase Bitcoin mining machines by issuance of ordinary shares. As of to date, we have entered into definitive purchase agreements with five Bitcoin mining machine owners and The9 has issued an aggregate of 3.8 million ordinary shares equivalent to 0.1 million ADSs at US$23.35 per ADS in exchange for 8,489 Bitcoin mining machines, with a total hash rate of approximately 156PH/S.

In March 2021, we signed three legally-binding MOUs with three Bitcoin mining machine owners to purchase Bitcoin mining machines by issuance of ordinary shares. According to the MOUs, The9 should issue to the sellers approximately 5.9 million ordinary shares, equivalent to 0.2 million ADSs and US$38.51 per ADS in exchange for 10,252 Bitcoin mining machines, with a total hash rate of approximately 192PH/S.

In February 2021, we signed a framework agreement with a Filecoin mining machine vendor to purchase Filecoin mining machines for US$10 million. In February 2021, we entered into a standby equity distribution agreement with YA II PN, LTD., a limited partnership managed by Yorkville Advisor Global, LP pursuant to which The9 is able to sell up to US$100.0 million of ADSs solely at our request at any time during the 36 months following the date of the agreement. As of today, we have not started to request funding from this equity line.

As of today, our deployed Bitcoin mining machines are contributing a total hash rate of approximately 693PH/S. Under this current hash rate, we have rewarded 3 Bitcoins per day. As of today, we have been rewarded 126 Bitcoins.

Based on the Bitcoin mining machines currently owned by us and taking account to the mining machines purchase agreements we have signed, assuming we do not sign any new purchase agreement and assuming global hash rate does not increase, by October 2022 our Bitcoin mining machines are expected to contribute a total hash rate of approximately 3,558PH/S. Under this hash rate, we are expected to be rewarded approximately 15 Bitcoins per day. The cumulative Bitcoins reward is expected to be approximately 5,200 Bitcoins.

Other than Bitcoins, we are also actively engaged in the mining of Filecoins. As of today, we have executed US$1.1 million purchase of Filecoin mining machines under the framework agreement with a Filecoin mining machine vendor. Currently, we own an independent node on Filecoin blockchain and 8 Pebibyte of effective storage mining power in the Filecoin network.

Assuming global hash rate does not increase, by August 2022 this 8 Pebibyte of effective storage mining power is expected to generate approximately 200,000 Filecoins for us. However, since the hash rate of the whole Filecoin network is increasing continuously, the actual reward to us will be less than 200,000 Filecoin. And actually as we just announced hours ago, we just signed a Filecoin mining machine purchase and hosting agreement amounting to approximately US$2 million with another Filecoin mining service provider. When both agreement are fully implemented, we expect to have a total of more than 80 Pebibytes of effective storage mining power in the Filecoin network.

We will continue to invest in the Filecoin mining machines according to the growth of Filecoin's market value.

So, thank you for listening to our presentation today. At this time, we will take questions. Operator, please.

[Operator]

[Operator Instructions] The first question comes from [Martin Chen of Ten Asset Management]. Please go ahead.

[Unidentified Analyst]

Hi, management. Can you hear me?

[George Lai, Chief Financial Officer]

Yes, please.

[Unidentified Analyst]

Yes. You already purchased sound secondhand machine, and I would like to know if you have any plan to continue to buying the secondhand machine? Or you transfer your strategy to buying the new machine?

[George Lai, Chief Financial Officer]

Yeah, we'll do it at the same time. So, we will buy the secondhand machines and at the same time, we will also buy new machines. So, based on our experience in the past two months, so we prefer to use the new issuance of shares to purchase the secondhand machines. And then we will use cash to buy the new machine. So, we have been working very well on these two – both of these two types of purchases.

[Unidentified Analyst]

Okay. So, in currently, which channel do you buy, do you – which channel can you buy more secondhand machine because we know everyone is tracing the hash rate, right? So, I don't know if we still have some resource to buy by the machine?

[George Lai, Chief Financial Officer]

Well, as I said in the beginning, so we are happy in January 2021 to have very experienced cryptocurrency mining pioneer, [Mr. Khan]. So, his team is very experienced in sourcing the second hand machines. So, as you can see, over the only two months, we have sources, three batches of secondhand machines. So, as you see, our share price keeps on going up. So, I think it's easy for us to use the same method to talk to different like Bitcoin or other cryptocurrency machine owners to transfer. So, we issued new shares to them and then they sell the machines to us.

[Unidentified Analyst]

Okay. My second question is about the entire Bitcoin network hash rate. Can you predict the hash rate by the end of 2021?

[George Lai, Chief Financial Officer]

I think this question, maybe we'll leave it to our CEO of NBTC [indiscernible]. Well, based on our estimation by August 2022, our hash rate expected is 3,000 and – about 3,500. So, of course, this is only assuming that we do not [acquire machine] either new machines or secondhand machine. Of course we understand that we will continue to buy machines from both sources. So, I think our actual number by the end of 2021 will be much larger than this number. So, of course, it also depends on our fundraising progress. So, this is our expectation.

[Unidentified Analyst]

Okay, because we also see other competitors by [lot of machine], so, do you see the entire network will be increased a lot, maybe by the end of 2021?

[George Lai, Chief Financial Officer]

[Indiscernible] talking about the global network, because the Bitcoin hash rate has already been quite high, compared to the other deal cons, so we do not expect a very significant increase in terms of the global network.

[Unidentified Analyst]

Okay, okay. My third question is about the Filecoin, can you talk more about why you are bullish on Filecoin? Do you have any expectation of its market cap in the future?

[George Lai, Chief Financial Officer]

Well, since we started to invest Filecoin in January, we’ve already seen a total market cap ranking from like 30, 40 to [now 13]. So, we believe that this is cryptocurrency with very high potential. So, I will not be surprised if it go into like top 10 within one month. So, of course, this is only my wild guess so, but as you can see, the sharp increase of cryptocurrency price the Filecoin over the past two months. So, I believe that this is like a very good potential cryptocurrency that we will further invest into.

[Unidentified Analyst]

Okay. So, do you have any target to invest? How much money in 2021, in Filecoin?

[George Lai, Chief Financial Officer]

Well, we already signed US$10 million [framework] agreement. And so, we will continue to execute under this agreement. And of course, as I said, we actually just signed another Filecoin machines purchase agreement with another vendor. So, it also proved that we have lots of sources to purchase these machines. So, I think this is our unique strength. So, we will continue to invest more. It depends on our strategy. And of course, at the same time we will continue to invest into Bitcoin and also Ethereum. So, I think we will have a closer look how to allocate our funding and resources into [this cause].

[Unidentified Analyst]

Compared to Bitcoin, how do you locate your CapEx about File coin or Bitcoin? Maybe you can give me some percentage of your CapEx.

[George Lai, Chief Financial Officer]

Well, Filecoin is a little bit special because other than the machine we also need Filecoin to do the patching in order to [indiscernible] more Filecoins. So, I cannot give you an exact number, but I will say for Bitcoin, if there is a light to both typical coins that we will definitely allocate our majority of our funding into, but Filecoin, we will also invest a lot. So, these are the top three coins that we are focusing on.

[Unidentified Analyst]

Sure. So, well Filecoin has any problems in accounting, because we know that we may be like lending it to the network. So, I'm not sure if it can be right on our financial accounting.

[George Lai, Chief Financial Officer]

Well, in terms of accounting, actually, I believe all the accounting treatment for the coins are the same, unless the specific coin that we are talking about, if they are too small and if they do not have any liquidity, then we may face a difficulty to [indiscernible] or as a asset. But as I said, the Filecoin now is – market cap is already like the Top 15 or Top 20. So, I don't foresee any accounting problem to recognize [this call].

[Unidentified Analyst]

Good, good. My last question is about [ETH], do you have any [ETH] mining plan in 2021?

[George Lai, Chief Financial Officer]

Yes. We are planning to invest into [ETH]. So, please have some expectation on our coming press release. I hope we can have some good news to share with the investors very soon.

[Unidentified Analyst]

Okay, thanks. Thanks a lot.

[George Lai, Chief Financial Officer]

Thank you.

[Operator]

[Operator Instructions] The next question comes from John [indiscernible], a Private Investor. Please go ahead.

[Unidentified Analyst]

Thank you very much. I was wondering if there are any detailed financial statements available, I just like to take a look at operating expenses and cash flow on an ongoing basis. Thank you.

[George Lai, Chief Financial Officer]

You mean in last year or this year?

[Unidentified Analyst]

Last year, particularly, and then quarterly on an ongoing basis.

[George Lai, Chief Financial Officer]

Well, for last year, we just filed our [annual report], which is on our 20-F. So, you can get it from SEC website. Going forward, we are considering to do our – like earnings release in a quarterly or [interim] basis. So, we want to be as transparent as possible so you can see our financial results then.

[Unidentified Analyst]

Thank you very much.

[George Lai, Chief Financial Officer]

Thanks.

[Operator]

This concludes our question-and-answer session and The9 Limited unaudited 2020 financial results conference call. Thank you for attending today's presentation. You may now disconnect.