Via SeekingAlpha.com

Quick Take

Ebang International Holdings (EBON) has filed to raise $106 million from the sale of its Class A shares, according to an amended registration statement.

The company provides mining equipment technologies for the Bitcoin cryptocurrency ecosystem.

EBON wants to use the IPO proceeds to diversify its operations into other geographies and business lines, similar in concept to poorly performing Canaan (CAN).

The IPO appears pricey and business prospects uncertain, so I’ll pass at this time.

Company & Technology

Hangzhou, Zhejiang Province-based Ebang was founded to design Bitcoin ASICs to maximize the efficiency and speed of Bitcoin mining equipment for customers.

Management is headed by founder, Chairman and CEO Mr. Dong Hu, who was previously an experienced teacher of information engineering and has extensive experience in networking and communications.

Below is a brief overview video of a review of the firm’s EBIT E12 series miner:

Source: TeslaWatt

The firm has three large customers which accounted for 34% of its revenue in 2018 and 2019.

EBON outsources the manufacturing of its ASIC designs to foundries located in the Asia Pacific region.

The company produced the first commercially available machine using a 10 nm ASIC and has since completed design on an 8 nm ASIC and is working on a 5 nm ASIC for non-Bitcoin cryptocurrencies such as Litecoin and Monero.

The founder and CEO Mr. Hu owns 41.82% of company stock pre-IPO.

Customer Acquisition

The company acquires customers through both online and offline direct sales efforts, product launch events, industry conference attendance and social media activities.

Management seeks to increase its overseas sales and marketing efforts, focusing especially on prospects in North America and Europe ‘in anticipation of future growth in the blockchain industry in those regions.’

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Selling expenses as a percentage of total revenue have been dropping as revenues have decreased, as the figures below indicate:

Selling

Expenses vs. Revenue

Period

Percentage

2019

1.1%

2018

1.3%

Source: Company registration statement

The Selling efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling spend, was a negative (173.1x) in the most recent reporting period.

Market & Competition

According to a 2019 market research report by Technavio, the market for cryptocurrency mining hardware is expected to grow by more than $2.2 billion between 2018 to 2022.

2018 saw a year-over-year growth rate of 8% and the forecast period is expected to grow at a CAGR Of almost 10%.

The main drivers for this expected growth are increasing demand for equipment from North America and Europe as the difficulty of Bitcoin mining increases force miners to upgrade their equipment for greater efficiency.

Major competitive vendors include:

  • Bitmain

  • BitFury

  • Halong

  • Canaan (CAN)

Financial Performance

Ebang’s recent financial results can be summarized as follows:

  • Sharply reduced topline revenue

  • Negative gross profit and negative gross margin

  • Increased operating losses

  • Reduced negative cash flow from operations

Below are relevant financial metrics derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

2019

$ 109,060,000

-65.8%

2018

$ 319,042,000

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

2019

$ (30,564,000)

-225.0%

2018

$ 24,446,000

Gross Margin

Period

Gross Margin

2019

-28.02%

2018

7.66%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

2019

$ (50,648,000)

-46.4%

2018

$ (31,061,000)

-9.7%

Net Income (Loss)

Period

Net Income (Loss)

2019

$ (41,073,000)

2018

$ (11,814,000)

Cash Flow From Operations

Period

Cash Flow From Operations

2019

$ (13,260,000)

2018

$ (108,232,000)

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Source: Company registration statement

As of December 31, 2019, Ebang had $3.5 million in cash and $81.6 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2019, was a negative ($19.1 million).

IPO Details

EBON intends to sell 19.3 million shares of Class A ordinary shares at a midpoint price of $5.50 per share for gross proceeds of approximately $106 million, not including the sale of customary underwriter options.

Class A shareholders will be entitled to one vote per share. The sole Class B shareholder will be the founder and CEO Mr. Dong Hu, who will retain 91.7% of voting power after the IPO.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $484.2 million.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 22.88%.

Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds as follows:

approximately 35.0%, or US$34.1 million, for expansion of overseas business and new businesses, including establishing research and development centers and taking selling and marketing initiatives overseas;

approximately 20.0%, or US$19.5 million, for our development and introduction of new mining machines;

approximately 15.0%, or US$14.6 million, for corporate branding and marketing activities; and

the remainder of the net proceeds for general corporate purposes, which may include working capital needs and other corporate uses.

Management’s presentation of the company roadshow is not available.

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Listed underwriters of the IPO are AMTD, Loop Capital Markets, and Prime Number Capital.

Commentary

Ebang is seeking U.S. public capital investment to fund its expansion into the U.S. as well as diversify its technology offerings.

For example, from the prospectus, “We are in the process of researching, and plan to launch, alternative products and solutions for non-cryptocurrency blockchain applications, such as medical recordkeeping and financial management.”

The company’s financials show the ravages of the boom and bust cycles of Bitcoin and the cryptocurrency markets, as its revenues have swung wildly from year to year.

The market opportunity for producing Bitcoin mining technologies is large but getting more competitive as much of the ‘low hanging fruit’ of performance enhancements appears to have already been picked.

As a comparable-based valuation, EBON is proposing to value itself at IPO at a much higher valuation than Canaan.

Both firms are seeking different ways to diversify away from crypto mining-centric operations. So far, Canaan’s stock has performed poorly and I have no evidence that EBON will do much better at its diversification efforts, at least at this juncture.

Expected IPO Pricing Date: June, 2020.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.