Ebang International Holdings Inc. annual report, Q4 FY2020

Ebang International Holdings Inc. — Form 20-F Summary

Reporting period: Fiscal year ended December 31, 2020. The filing is an annual Form 20-F, not a standalone fourth-quarter filing. Financial statements are prepared under U.S. GAAP and reported in U.S. dollars.

Business context

Ebang designs ASIC chips and manufactures Bitcoin mining machines under the Ebit brand. It also provides mining-machine hosting and maintenance services and sells telecommunications products in China. The Cayman Islands parent is primarily a holding company; operations are conducted through subsidiaries, principally in China. Class A ordinary shares trade on Nasdaq under the symbol EBON.

Bitcoin mining machines and related accessories accounted for 42.3% of 2020 revenue, versus 82.4% in 2019.
Mining-machine hosting and related services increased to 49.1% of revenue from 14.5% in 2019.
Telecommunications products accounted for 8.6% of revenue, versus 3.1% in 2019.
China represented 99.8% of 2020 revenue.

Financial highlights

Metric	2020	2019	Change
Revenue	$19.0 million	$109.1 million	Down 82.6%
Gross profit/(loss)	$(2.9) million	$(30.6) million	Loss narrowed
Gross margin	Approximately (15.3%)	Approximately (28.0%)	Improved
Operating loss	$(26.6) million	$(50.6) million	Loss narrowed 47.4%
Net loss	$(32.1) million	$(41.1) million	Loss narrowed
Net loss attributable to Ebang	$(30.7) million	$(42.4) million	Loss narrowed
Net cash used in operating activities	$(15.8) million	$(13.3) million	Outflow increased
Net cash used in investing activities	$(63.2) million	$(5.8) million	Outflow increased
Net cash provided by financing activities	$92.1 million	$8.5 million	Increased

The company sold 11,230 mining machines in 2020, compared with 289,953 in 2019. Average selling price per machine increased to approximately $697 from $304 because of product mix, while average selling price per TH/s increased slightly to $16 from $15. The filing states that the average selling price of the E12 model declined from $948 in 2019 to $681 in 2020.

Mining-machine revenue declined to $8.0 million from $89.9 million.
Hosting-service revenue declined to $9.1 million from $15.7 million.
Cost of revenues fell to $21.9 million from $139.6 million.
Operating expenses increased to $23.7 million from $20.1 million, primarily due to higher IPO-related professional fees.
Research and development expense was $8.5 million, compared with $13.4 million in 2019.
Inventory write-downs were $3.6 million, compared with $6.3 million in 2019 and $61.8 million in 2018.
Income-tax expense increased to $9.3 million, primarily because of an allowance against deferred tax assets.

Liquidity, capital resources and debt

Cash and cash equivalents were $13.7 million at December 31, 2020, compared with $3.5 million at December 31, 2019. Total cash, cash equivalents and restricted cash were $14.1 million.
Current assets were $68.6 million, including $40.8 million of available-for-sale debt investments. Total assets were $144.2 million.
Total liabilities were $34.4 million, compared with $57.0 million at year-end 2019. Equity was $109.8 million.
Outstanding debt at year-end consisted primarily of a $0.8 million bank loan due in 2021 and $5.7 million owed to a related party. The filing states these obligations were subsequently repaid, including repayment of the related-party balance by March 11, 2021.
Operating cash flow remained negative for the third consecutive year. The company stated that existing cash, expected financing proceeds and anticipated operating cash flow should meet needs for the next 12 months, but acknowledged that additional capital may be required.
2020 investing outflows included $10.8 million for property, plant and equipment, $11.9 million for intangible assets and net purchases of debt investments.

Material changes versus prior comparable period

Revenue collapsed by 82.6%, reflecting COVID-19 disruptions, semiconductor supply constraints, the May 2020 Bitcoin block-reward halving and lower demand and pricing for mining machines.
The business mix shifted materially from mining-machine sales toward hosting services, although total service revenue also declined.
Gross loss narrowed substantially because of lower inventory write-downs and reduced cost of revenues, but the company remained unprofitable.
Operating expenses increased despite the revenue decline, driven primarily by IPO and professional fees.
Cash improved mainly through equity financing rather than operations. Net cash provided by financing activities included $114.2 million from share issuance, partly offset by related-party repayments.
Property, plant and equipment increased to $29.1 million from $13.2 million, and intangible assets increased to $23.1 million from $3.8 million, including an approximately $19.9 million exclusive patent license.
Net accounts receivable declined to $7.2 million, but the allowance for doubtful accounts increased to $4.8 million from $1.8 million.
Deferred tax assets were substantially written down; reported deferred tax assets declined from $8.5 million to zero on the balance sheet.

Outlook, management commentary and unusual items

Management intends to focus on cryptocurrency and blockchain businesses, including new generations of Bitcoin mining machines, mining farms, proprietary mining and cryptocurrency exchanges.
The company planned to launch cryptocurrency exchange operations in Canada, Australia and Singapore in early 2022 and expected an initial investment of approximately $4.0 million. Canada had granted a Money Service Business License; Singapore and Australia approvals remained pending.
Ebonex, the company’s proprietary cryptocurrency exchange platform, was launched in April 2021, after the reporting period. The filing does not report revenue from the exchange business through the filing date.
Planned product development included 6nm and 5nm ASICs, as well as machines for Litecoin, Dogecoin, Ethereum and Filecoin. Launch timing and commercial success remained uncertain.
The company identifies Bitcoin price, mining difficulty, declining block rewards, electricity costs, regulatory changes, customer concentration, semiconductor supply and technology execution as major drivers of future results.
Customer concentration was high: the top three customers represented approximately 50% of 2020 revenue and the top ten represented approximately 91%.
The company disclosed several ongoing customer and supplier disputes, including claims involving large mining-machine orders and a $25.1 million claim against a supplier. Potential exposure could not be reasonably estimated for certain cases.
Class-action lawsuits were reported in April 2021 in connection with alleged materially false or misleading statements; the company had not been formally served and could not assess the likelihood of an unfavorable outcome.
The company reported one material weakness in internal control over financial reporting related to insufficient accounting personnel with appropriate U.S. GAAP and financial-reporting experience. Management also concluded that disclosure controls and procedures were not effective as of December 31, 2020.
The company does not expect to pay cash dividends in the foreseeable future.

Most important facts for investors to verify

Whether revenue and gross margins recover as Bitcoin prices, mining economics and machine demand change.
Whether the company can generate positive operating cash flow without continued equity or debt financing.
The liquidity and valuation of the $40.8 million debt-investment balance and the availability of cash held by PRC subsidiaries.
The collectability of accounts receivable, particularly given the $4.8 million allowance and significant customer concentration.
Progress, licensing status, capital requirements and regulatory compliance for Ebonex and proposed exchange operations in Canada, Australia and Singapore.
Resolution and potential financial impact of customer, supplier, intellectual-property and investor litigation.
Remediation of the material weakness and ineffective disclosure controls.
Dependence on Samsung, TSMC and other limited suppliers for ASIC fabrication, packaging and testing.
Potential impact of PRC cryptocurrency, energy-use, tax, foreign-exchange and cross-border capital-transfer restrictions.
Share dilution and warrant overhang from the 2020-2021 offerings, warrant exercises and subsequent issuances.