Ebang International Holdings Inc. annual report, Q4 FY2023

Ebang International Holdings Inc. — Form 20-F Summary

Reporting period: Fiscal year ended December 31, 2023. The filing is an annual Form 20-F, not a standalone fourth-quarter filing. Financial statements are prepared under U.S. GAAP and audited by MaloneBailey, LLP.

Business context

Ebang is a Cayman Islands holding company operating primarily through subsidiaries in China, Australia, Hong Kong and other jurisdictions. Its businesses include ASIC design and Bitcoin mining machines, telecommunications equipment, cryptocurrency exchange services through Ebonex, and cross-border payment and foreign exchange services through EbonFX. The company does not use a VIE structure.

Management plans to focus on blockchain and Fintech businesses in 2024, expand overseas operations and pursue compliant mining-farm opportunities, while continuing to evaluate opportunities outside these sectors, including sustainable energy.

Key financial metrics

US$ in thousands, except percentages	2023	2022	Change
Revenue	4,855	32,328	Down 85.0%
Gross profit (loss)	(16,704)	15,412	Decline of 32,116
Gross margin	(344.1%)	47.7%	Down 391.8 percentage points
Loss from operations	(53,639)	(47,988)	Loss increased 11.8%
Net loss	(38,034)	(45,757)	Loss decreased 16.9%
Net loss attributable to Ebang	(36,772)	(43,888)	Loss decreased 16.2%
Operating cash flow	(11,653)	4,297	Turned negative
Investing cash flow	2,753	6,609	Down 58.4%
Capital expenditures	1,000	14,100	Down materially

Revenue mix

Bitcoin mining machines and accessories: US$0.3 million, or 5.5% of revenue, versus US$25.8 million, or 79.8%, in 2022.
Telecommunications products: US$0.5 million, or 10.6%, versus US$3.7 million, or 11.6%.
Cryptocurrency exchange services: US$1.0 million, or 21.5%, versus US$0.1 million.
Cross-border payment and foreign exchange services: US$2.6 million, or 54.3%, compared with US$2.6 million, or 8.1%.
Management and maintenance services: US$0.4 million, or 8.1%, versus US$0.1 million.
Australia represented 75.8% of 2023 revenue; mainland China represented 24.2%.

Balance sheet, liquidity and debt

Cash and cash equivalents were US$241.6 million at December 31, 2023, compared with US$251.3 million at December 31, 2022. Cash, cash equivalents and restricted cash totaled US$242.9 million.
Total assets were US$298.2 million and total liabilities were US$16.9 million. Total equity was US$281.3 million.
The filing does not disclose material bank debt at year-end. Liabilities primarily consisted of accounts payable, accrued liabilities and operating lease liabilities.
Operating lease liabilities totaled US$6.7 million, including US$1.8 million current and US$4.9 million non-current obligations.
Net accounts receivable declined to US$0.9 million from US$3.3 million. The allowance for doubtful accounts was US$2.1 million.
Accrued liabilities and other payables were US$9.8 million, including US$4.1 million payable to property, plant and equipment suppliers and US$1.6 million of customer custodial cash liabilities.
Management stated that existing cash, anticipated financing proceeds and expected operating cash flows should meet anticipated needs for the next 12 months, although additional financing may be required for expansion, acquisitions or other investments.

Material changes versus the prior comparable period

Revenue fell 85.0%, primarily because 2022 included approximately US$25.8 million from a one-time court-mediated payment from two former customers. The 2023 cryptocurrency market remained cautious following industry bankruptcies and fraud incidents.
Product revenue collapsed from US$29.5 million to US$0.8 million, while service revenue increased from US$2.8 million to US$4.1 million as Fintech activities became the primary revenue source.
Cost of revenue increased 27.4% to US$21.6 million despite lower sales, principally because the company recorded a US$16.7 million impairment of VAT recoverable that it does not expect to recover in the foreseeable future.
Inventory write-downs declined to US$0.3 million from US$6.5 million, but inventory remained heavily reserved: gross inventory was US$30.6 million and the accumulated write-down was US$30.4 million.
Operating expenses declined to US$36.9 million from US$63.4 million. However, 2023 included US$3.7 million of intangible-asset impairment and US$2.3 million of goodwill impairment related to the Compass Global acquisition.
Interest income increased to US$11.9 million from US$4.4 million, partly offsetting operating losses. The company also recorded a US$0.7 million gain on disposal of cryptocurrency assets and a US$2.3 million loss from a cybersecurity event.
Cash used in operations was US$11.7 million, compared with US$4.3 million provided by operations in 2022. Total cash declined by US$9.3 million during 2023.
Production utilization declined to 9.1% in 2023 from 26.5% in 2022, indicating substantial excess capacity.

Guidance, outlook, risks and unusual items

No quantified revenue, earnings or margin guidance is provided. Management expects continued volatility and states that Bitcoin prices, mining economics and regulatory developments will materially affect results.
Cryptocurrency mining and digital-asset transactions are illegal or severely restricted in mainland China. The company halted Chinese mining-machine custody services in April 2021 and states that it will not conduct cryptocurrency mining or trading operations in mainland China.
Bitcoin price volatility, mining difficulty, energy costs, periodic Bitcoin-reward halvings and regulatory restrictions directly affect demand and pricing for mining machines.
The company is expanding into regulated overseas Fintech markets, but many businesses have limited operating histories, have generated limited revenue and remain dependent on obtaining or maintaining licenses and approvals.
The company reported a 2023 cybersecurity incident that resulted in an approximately US$2.3 million cryptocurrency loss. Recovery efforts are ongoing, but recovery is not assured. The filing states that no material cybersecurity incident interrupted operations or materially affected strategy, financial condition or results of operations, creating a distinction between the disclosed cryptocurrency loss and the broader cybersecurity disclosure.
A civil action against a former ASIC-wafer supplier seeking approximately US$25 million plus interest and costs remained under court review. The filing does not provide a clear estimate of the potential recovery or outcome.
The company is pursuing enforcement of approximately RMB73.6 million owed by a former mining-machine customer. A separate dispute involving RMB2 million and 30 bitcoins remained under appeal.
Management determined that disclosure controls and internal control over financial reporting were not effective as of December 31, 2023 because of a material weakness involving insufficient accounting personnel with U.S. GAAP and SEC-reporting expertise. Remediation is in progress, but completion is not assured.
The company is controlled by Dong Hu, who holds all Class B shares and approximately 86.2% of total voting power. Class B shares have 20 votes per share.
The company does not expect to pay dividends in the foreseeable future. PRC subsidiaries have not historically paid dividends or other distributions to offshore entities or U.S. investors.
The company remains subject to PRC regulatory, foreign-exchange, tax, data-security and overseas-listing filing risks. It states that it has not been identified as a Commission-identified issuer under the HFCAA and that its U.S.-based auditor is currently subject to PCAOB inspection.

Most important facts for investors to verify

Verify the sustainability and quality of the transition from mining-machine sales to Ebonex and EbonFX revenue, including transaction volumes, gross economics and customer concentration.
Reconcile the US$16.7 million VAT recoverable impairment and assess whether the remaining US$4.1 million VAT recoverable is realistically recoverable.
Review the cybersecurity incident, the US$2.3 million loss, asset-custody controls and the status of recovery efforts.
Assess liquidity after recurring operating cash burn, planned overseas expansion, lease obligations and potential litigation or regulatory costs.
Review the material weakness in financial reporting controls and management’s remediation timetable and staffing.
Evaluate the near-term usefulness and recoverability of inventory, patents, licenses, goodwill and other intangible assets.
Confirm the status and financial exposure of the supplier litigation and customer collection proceedings.
Monitor PRC restrictions on cryptocurrency activities, CSRC filing requirements, overseas licensing, sanctions compliance and possible changes in U.S. exchange-listing requirements.
Consider the implications of the dual-class structure, concentrated voting control and the absence of expected dividends.