ITEM 3.
KEY INFORMATION
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B.
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Capitalization
and indebtedness
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Not
applicable.
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C.
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Reasons
for the offer and use of proceeds
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Not
applicable.
Our
business, financial condition and results of operations could be materially and adversely affected if any of the risks described
below occur. As a result, the market price of our common shares could decline, and you could lose all or part of your investment.
This annual report also contains forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements.”
The risks below are not the only ones facing our Company. Additional risks not currently known to us or that we currently deem
immaterial may also adversely affect us. The following risk factors have been grouped as follows:
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a)
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Risks relating to
our limited operating history and financial position;
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b)
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Risks
relating to our cryptocurrency, blockchain and mining related businesses;
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c)
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Risks
relating to our business operations;
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d)
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Risks relating to
conducting business in China; and
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e)
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Risks relating to
our securities.
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Summary
of Key Risks
Our
business is subject to numerous risks and uncertainties, discussed in more detail below. These risks include, among others, the
following key risks:
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Our results of operations
have been and are expected to continue to be significantly impacted by the fluctuation of Bitcoin price, and in particular,
significantly and negatively impacted by sharp Bitcoin price decreases
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We have derived, and may continue to derive, a significant portion of our revenues from our Bitcoin mining machines business. If the market for Bitcoin mining machines ceases to exist or diminishes significantly, our business, results of operations and financial condition would be materially and adversely affected
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The industries in which we operate, and which we intend to operate in the future, are characterized by constant changes. If we fail to continuously innovate and to provide products that meet the expectations of our customers, we may be unable to attract new customers or retain existing customers, and hence our business and results of operations may be adversely affected
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We have in the past incurred, and continue to incur, losses and negative cash flows from operating activities, and we may not achieve or sustain profitability
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Our limited operating
history and our volatile historical results of operations could make it difficult for us to forecast our business and assess
the seasonality and volatility in our business
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The global coronavirus
COVID-19 outbreak has caused significant disruptions in our business, which we expect may continue to materially and adversely
affect our results of operations and financial condition
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Increasing mining
difficulty and decreasing mining rewards could result in downward pressure on the expected economic returns on Bitcoin mining
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High customer concentration
exposes us to all of the risks faced by our major customers and may subject us to significant fluctuations or declines in
revenues
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We have been involved,
and may continue to be involved, in disputes, claims or proceedings arising from our operations from time to time, which could
result in significant liabilities and reputational harm and could materially and adversely affect our business, financial
condition and results of operations
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Our business requires significant financial resources and we may need additional capital, but we may not be able to obtain it in a timely manner and on favorable terms, if at all
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Our business growth
is dependent on the development of blockchain technology and applications, particularly in the field of Bitcoin
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The average selling
prices of our products may decrease from time to time due to technological advancement and we may not be able to pass onto
our suppliers such decreases, which may in turn adversely affect our profitability
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We may not be able
to price our products at our desired margins as a result of any decrease in our bargaining power or changes in market conditions
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We are exposed to
credit risks and concentration of credit risks in relation to defaults from counterparties
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Adverse changes
in the regulatory environment in the PRC market could have a material adverse impact on our blockchain products business
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The current regulatory
environment in foreign markets, and any adverse changes in that environment, could have a material adverse impact on our blockchain
products business and our planned cryptocurrency exchange and financial service platform businesses
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If we are unable
to manage our growth or execute our strategies effectively, our business, results of operations and financial condition may
be materially and adversely affected
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Each of our subsidiaries
in Canada, Australia and Singapore have a limited operating history, which makes it hard for us to evaluate their ability
to generate revenue through operations, and to date, each of them has not generated revenue from any commercially available
blockchain-based products or services
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The businesses that
we are pursuing through certain of our subsidiaries’ initiatives are novel and subject to technical, operational, financial,
regulatory, legal, reputational and marketing risks
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The development and operation of our cryptocurrency exchanges and online brokerages will likely require technology and intellectual property rights
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We may not successfully
develop, market or launch any cryptocurrency exchanges or online brokerages
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If Bitcoin is replaced
by other cryptocurrencies as the mainstream cryptocurrency, we will lose the market for our current mining machines and our
results of operations will be materially and adversely affected
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We rely on a limited
number of third parties to fabricate our ASIC chips, which are the core technology used in our mining machines
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Our prepayments
to suppliers may subject us to counterparty risk associated with such suppliers and negatively affect our liquidity
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If we fail to maintain
appropriate inventory levels in line with the approximate level of demand for our products, we could lose sales or face excessive
inventory risks and holding costs
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Shortages in, or
rises in the prices of, the components of our mining machines may adversely affect our business
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Failure at tape-out
or failure to achieve the expected final test yields for our ASIC chips could negatively impact our results of operations
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If any person, institution
or a pool of them acting in concert obtains control of more than 50% of the processing power active on the Bitcoin network,
such person, institution or a pool of them could prevent new transactions from gaining confirmations, halt payments between
users, and reverse previously completed transactions, which would erode user confidence in Bitcoin
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The decentralized
nature of Bitcoin may be subject to challenges, which could negatively affect our results of operations
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Change of Bitcoin
algorithms and mining mechanisms may materially and adversely affect our business and results of operations
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We face risks associated
with the expansion of our blockchain products business operations overseas and if we are unable to effectively manage such
risks, our business growth and profitability may be negatively affected
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We plan to increase
our export of mining machines to the United States and the European Union in the future, which may be subject to high tariff
rates resulting from protectionism trade policies, and as a result, our future sales volumes, profitability and results of
operations will be materially and adversely affected
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We
may be unable to make the substantial research and development investments that are required to remain competitive in our business
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Risks
Relating to Our Limited Operating History and Financial Position
We
have in the past incurred and continue to incur losses and negative cash flows from operating activities, and we may not achieve
or sustain profitability
We
incurred a loss from operations of US$31.1 million, US$50.6 million and US$26.6 million in 2018, 2019 and 2020, respectively.
We generated gross profit of US$24.4 million in 2018 and incurred a gross loss of US$30.6 million and US$2.9 million in 2019 and
2020. We had negative cash flows from operating activities of US$108.2 million, US$13.3 million and US$15.8 million for 2018,
2019 and 2020, respectively. In addition, we have received significant non-recurring tax rebates from local governments in the
past, but we cannot assure you that we will continue to receive significant tax rebates or other discretionary government grants
in the future. Even if we are eligible for any additional tax rebates or other government grants, we cannot assure you of the
timing and the amount of any such rebates or other grants. To the extent that we do not receive any additional tax rebates
or other government grants, our financial condition could be materially and adversely affected. We cannot assure you that we will
be able to generate net profit or positive cash flow from operating activities in the future. Our ability to achieve profitability
will depend in large part on our ability to control expenses and manage our growth effectively, to achieve a more stable performance
given the significant fluctuation and volatility of the Bitcoin price and Bitcoin mining machine business, and to maintain our
competitive advantage in the Bitcoin markets. We expect to continue to make investments in the development and expansion of our
business, which will place significant demands on our management and our operational and financial resources. Continuous expansion
may increase the complexity of our business, and we may encounter various difficulties. We may fail to develop and improve our
operational, financial and management controls, enhance our financial reporting systems and procedures, recruit, train and retain
highly skilled personnel, or maintain customer satisfaction to effectively support and manage our growth. If we invest substantial
time and resources to expand our operations but fail to manage the growth of our business and capitalize on our growth opportunities
effectively, we may not be able to achieve profitability, and our business, results of operations and financial condition would
be materially and adversely affected.
Our
limited operating history and our volatile historical results of operations could make it difficult for us to forecast our business
and assess the seasonality and volatility in our business
We
began producing and selling our own brand mining machines in December 2016. We generated US$319.0 million, US$109.1 million
and US$19.0 million in revenue in 2018, 2019 and 2020, respectively. As we have suffered from the significant drop in the average
Bitcoin price historically, we cannot assure you that we will be able to gain revenue growth or that we will not experience another
significant decline.
As
the market for Bitcoin mining machines is relatively nascent and still rapidly evolving, we cannot forecast longer-term demand
or order patterns for our products. Because of our limited operating history and historical data, as well as the limited visibility
into future demand trends for our products, we may not be able to accurately forecast our future total revenue and budget our
operating expenses accordingly. As most of our expenses are fixed in the short-term or incurred in advance of anticipated total
revenue, we may not be able to adjust our expenses in a timely manner in order to offset any shortfall in revenue.
Our
business is subject to the varying order patterns of the Bitcoin mining machine market. In addition, many of the regions in which
our products are purchased have varying holiday seasons that differ from traditional patterns observed by other semiconductor
suppliers and these seasonal buying patterns can impact our sales. We have experienced fluctuations in orders during our limited
operating history, and we expect such volatility to occur in the future. Our volatile historical results of operations could make
it difficult to assess the impact of seasonal factors on our business. If we or any of our third-party manufacturing service providers
are unable to increase production of new or existing products to meet any increases in demand due to seasonality or other factors,
our total revenue would be adversely affected and our reputation with our customers may be damaged. Conversely, if we overestimate
customer demand, we may reduce our orders or delay shipments of our products from units forecasted, and our total revenue in a
particular period could be lower than expected.
Our
business requires significant financial resources and we may need additional capital but may not be able to obtain it in a timely
manner and on favorable terms or at all
We
had negative cash flows from operating activities of US$108.2 million, US$13.3 million and US$15.8 million for 2018, 2019 and
2020, respectively. We have in the past financed our working capital needs primarily with our net cash from operating activities,
capital contributions by shareholders and bank borrowings.
We
may require additional cash resources due to the future growth, development and expansion of our business. Our future capital
requirements may be substantial as we seek to expand our operations, diversify our product offering, and pursue acquisitions and
equity investments. In addition, we incurred accrued payables of US$21.9 million and accounts payable of US$2.8 million as of
December 31, 2020. If our cash resources are insufficient to satisfy our cash requirements, we may be required to seek to issue
additional equity or debt securities or obtain new or expanded credit facilities or enter into additional factoring arrangements.
Our
ability to obtain external financing in the future is subject to a variety of uncertainties, including our future financial condition,
results of operations and cash flows and the liquidity of international capital and lending markets. In addition, our loan agreements
may contain financial covenants that restrict our ability to incur additional indebtedness or to distribute dividends. Any indebtedness
that we may incur in the future may also contain operating and financial covenants that could further restrict our operations.
There can be no assurance that financing will be available in a timely manner or in amounts or on terms acceptable to us, or at
all. A large amount of bank borrowings and other debt may result in a significant increase in interest expense while at the same
time exposing us to increased interest rate risks. Equity financings could result in dilution to our shareholders, and the securities
issued in future financings may have rights, preferences and privileges that are senior to those of our ordinary shares. Any failure
to raise needed funds on terms favorable to us, or at all, could severely restrict our liquidity as well as have a material adverse
effect on our business, results of operations and financial condition.
Risks
Relating to Our Cryptocurrency, Blockchain and Mining Related Businesses
Our
results of operations have been and are expected to continue to be significantly impacted by the fluctuation of Bitcoin price,
and in particular, significantly and negatively impacted by sharp Bitcoin price decreases
Our
mining machines are currently designed primarily for Bitcoin mining. The demand for, and pricing of, our mining machines are therefore
affected by the expected economic returns of Bitcoin mining activities, which in turn are primarily driven by, among other factors,
the Bitcoin price. The price of Bitcoin has experienced significant fluctuations over its short existence and may continue to
fluctuate significantly in the future. According to Bitcoin.com, Bitcoin prices ranged from approximately US$3,733 per coin as
of December 31, 2018, US$7,174 per coin as of December 31, 2019, to US$28,968 per coin as of December 31, 2020.
According to the same source, from January 1, 2020 to December 31, 2020, the highest Bitcoin price was approximately
US$28,968 per coin and the lowest was US$4,982 per coin. In particular, the Bitcoin price had risen significantly since the fourth
quarter of 2020 and reached US$58,918 per coin as of March 31, 2021. The decrease in the Bitcoin price in 2018 and the first
quarter of 2019 resulted in a material decrease in our sales volume and in the average selling price of our Bitcoin mining machines.
Although the Bitcoin price started to recover in the second quarter of 2019. Our operations generally lag behind increases in
Bitcoin price, and we recorded a revenue of US$109.1 million in 2019. In the first three quarters of 2020, the Bitcoin price had
fluctuated, while in the fourth quarter of 2020, it increased significantly. As a result, our business and results of operations
were adversely affected by the global market panics over the COVID-19 outbreak in 2020.
We
expect our results of operations to continue to be affected by the Bitcoin price, as we generated 96.3%, 82.4% and 42.3% of our
revenue from sales of our Bitcoin mining machines and related accessories in 2018, 2019 and 2020, respectively, and 2.4% and 14.4%
and 48.1% from provision of mining machine hosting services in the same periods, respectively. Any future significant reductions
in the price of Bitcoin will likely have a material and adverse effect on our results of operations and financial condition. We
cannot assure you that the Bitcoin price will remain high enough to sustain the demand for our Bitcoin mining machines or that
the Bitcoin price will not decline significantly in the future. Furthermore, fluctuations in the Bitcoin price can have an immediate
impact on the trading price of our Class A ordinary shares even before our financial performance is affected, if at all.
In
addition to the market volatility, various other factors, mostly beyond our control, could impact the Bitcoin price. For example,
the usage of Bitcoins in the retail and commercial marketplace is relatively low in comparison with the usage for speculation,
which contributes to Bitcoin price volatility.
If
the Bitcoin price or Bitcoin network transaction fees drop and fail to recover, the expected economic return of Bitcoin mining
activities will diminish, thereby resulting in a decrease in demand for our Bitcoin mining machines. As a result, we may need
to reduce the price of our Bitcoin mining machines. At the same time, if transaction fees increase to such an extent as to discourage
users from using Bitcoins as a medium of exchange, it may decrease the transaction volume of the Bitcoin network and may affect
the demand for our Bitcoin mining machines and hosting services. In addition, any shortage of power supply due to government control
measures or other reasons, and any increase in energy costs, would raise the costs of Bitcoin mining. This in turn could affect
our customers’ expected economic return for mining activities and the demand for and pricing of our current Bitcoin mining
machines and hosting services.
Furthermore,
fluctuations in the Bitcoin price may affect the value of our inventory as well as the provision we make to the inventory as we
manage our inventory based on, among others, the sales forecast of our Bitcoin mining machines. As we generally increase our procurement
volume and stock up finished goods for the launch of new products or we expect a surge of demand of Bitcoin mining machines, a
significant drop in the Bitcoin price can lead to a lower expected sales price and excessive inventory, which in turn will lead
to impairment losses with respect to such inventory. For example, in 2018 and 2019, as a result of the significant drop in the
Bitcoin price, we recorded write-downs for the potentially obsolete, slow-moving inventory and lower of cost or market adjustment
of US$61.8 million and US$6.3 million in cost of revenues, respectively, which in turn had a significant negative impact on our
profitability. In 2020, we also recorded write-downs for the potentially obsolete, slow-moving inventory and lower of cost or
market adjustment of US$3.6 million for the same reason. If the Bitcoin price drops significantly in the future, we may need to
make similar write-downs again. To the extent that we are able to sell such inventory above its carrying value, our gross profit
may also be inflated by such write down.
The
Bitcoin price drop also adversely impacted the ability of our customers who purchased our Bitcoin mining products to make payments.
We offered sales on credit to some of our customers in response to the Bitcoin price drop in 2018, 2019 and 2020 and may continue
to offer credit sales when the Bitcoin price drops significantly. Additionally, if the Bitcoin price drops significantly in the
future, we may need to offer to certain of our customers price concession, even if we generally do not offer a price concession
to customers. See “Management’s discussion and analysis on financial condition and results of operations—Critical
Accounting Policies—Revenue recognition” for details. For example, we accepted a lower amount of consideration for
sales to certain of our significant longstanding customers in China to maintain a good customer relationship when the Bitcoin
price dropped significantly in 2018, and thus provided price concession of US$12.1 million to such customers in 2018. We did not
provide price concession to customers in 2019 and 2020. However, we cannot assure you that we will not provide such price concession
in the future. If we provide any price concession to our customers in the future, our revenues and results of operations may be
adversely affected.
We
have derived and may continue to derive a significant portion of our revenues from our Bitcoin mining machines business. If the
market for Bitcoin mining machines ceases to exist or diminishes significantly, our business, results of operations and financial
condition would be materially and adversely affected
We
have generated, and expect to generate in the foreseeable future, a significant portion of our revenues from sales of our Bitcoin
mining machines. Sales of our Bitcoin mining machines and related accessories accounted for 96.3%, 82.4% and 42.3% of our revenues
in 2018, 2019 and 2020, respectively. Revenues from provision of mining machine hosting services also accounted for 2.4%, 14.4%
and 48.1% of our revenues in 2018, 2019 and 2020, respectively. If the market for Bitcoin mining machines ceases to exist or diminishes
significantly, we would experience a significant loss of sales, cancelation of orders, or loss of customers for our Bitcoin mining
machines. Adverse factors that may affect the market for Bitcoin mining machines include:
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Another cryptocurrency,
especially one that is not created using the same mining processes as Bitcoin, displaces Bitcoin as the mainstream cryptocurrency,
thereby causing Bitcoin to lose value or become worthless, which could adversely affect the sustainability of our business.
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Bitcoin fails to
gain wide market acceptance and fails to become a generally accepted medium of exchange in the global economy due to certain
inherent limitations to cryptocurrencies.
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Over time, the reward
for Bitcoin mining will decline in terms of the amount of Bitcoin awarded, which may reduce the incentive to mine Bitcoin.
Specifically, a recent halving event occurred in May 2020, and Bitcoins are expected to be fully mined out by the year of
2140. Therefore, Bitcoin mining machines may become less productive as the available rewards for Bitcoin mining continue to
decrease.
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If
we cannot maintain the scale and profitability of the sales of our Bitcoin mining machines and, at the same time, successfully
expand our business in other application markets, our business, results of operations, financial condition and prospects will
suffer. Furthermore, excess inventory, inventory markdowns, brand image deterioration and margin squeeze caused by declining economic
returns for miners or pricing competition for our Bitcoin mining machines could all have a material and adverse effect on our
business, results of operations and financial condition.
The
industries in which we operate and which we intend to operate in the future are characterized by constant changes. If we fail
to continuously innovate and to provide products that meet the expectations of our customers, we may be unable to attract new
customers or retain existing customers, and hence our business and results of operations may be adversely affected
The
industries in which we operate and intend to operate in the future are characterized by constant changes, including rapid technological
evolution, continual shifts in customer demands, frequent introductions of new products and solutions and constant emergence of
new industry standards and practices. Thus, our success will depend, in part, on our ability to respond to these changes in a
cost-effective and timely manner. We need to anticipate the emergence of new technologies and assess their market acceptance.
We also need to invest significant resources in research and development in order to keep our products competitive in the market.
However,
research and development activities are inherently uncertain, and we might encounter practical difficulties in commercializing
our research and development results, which could result in excessive research and development expenses or delays.
Given the fast pace with which blockchain has been and will continue to be developed, we may not be able to timely upgrade our
technologies in an efficient and cost-effective manner, or at all. In addition, new developments in AI, deep learning, Internet-of-things,
computer vision, blockchain and cryptocurrency could render our products obsolete or unattractive. If we are unable
to keep up with the technological developments and anticipate market trends, or if new technologies render our technologies or
solutions obsolete, customers may no longer be attracted to our products and services. As a result, our business, results of operations
and financial condition would be materially and adversely affected.
Increasing
mining difficulty and decreasing mining rewards could result in downward pressure on the expected economic returns on Bitcoin
mining
The
difficulty of Bitcoin mining, or the amount of computational resources required for a set amount of reward for recording a new
block, directly affects the expected economic returns for Bitcoin miners, which in turn affects the demand for our Bitcoin mining
machines. Bitcoin mining difficulty is a measure of how much computing power is required to record a new block, and it is affected
by the total amount of computing power in the Bitcoin network. The Bitcoin algorithm is designed so that one block is generated,
on average, every ten minutes, no matter how much computing power is in the network. Thus, as more computing power joins the network,
and assuming the rate of block creation does not change (remaining at one block generated every ten minutes), the amount of computing
power required to generate each block and hence the mining difficulty increases. In other words, based on the current design of
the Bitcoin network, Bitcoin mining difficulty would increase together with the total computing power available in the Bitcoin
network, which is in turn affected by the number of Bitcoin mining machines in operation. For example, Bitcoin mining difficulty
would increase based on increases in the total computing power available in the Bitcoin network, which is in turn affected by
the number of Bitcoin mining machines in operation. From January 2017 to December 2020, Bitcoin mining difficulty increased by
approximately 55 times, according to BTC.com. As a result, a strong growth in sales of our Bitcoin mining machines can contribute
to further growth in the total computing power in the network, thereby driving up the difficulty of Bitcoin mining and resulting
in downward pressure on the expected economic return of Bitcoin mining and the demand for, and pricing of, our products.
In
addition, the number of Bitcoins awarded for solving a block in the blockchain halves approximately every four years until the
estimated complete depletion of Bitcoin by around the year 2140. In each of 2013, 2014 and 2015, approximately 25 Bitcoins were
awarded for each block solved. The number of Bitcoins awarded for solving a block halved in 2016 to 12.5 Bitcoins per block, and
halved again in May 2020 to 6.25 Bitcoins per block. We have experienced declined demand for Bitcoin mining machines since the
Bitcoin halving event in May 2020 as the mining rewards were slashed and the expected economic returns on Bitcoin mining was adversely
affected.
Aside
from mining rewards, transaction fees are another form of incentive for participation in Bitcoin verification processes. Bitcoin
users may offer to pay a discretionary Bitcoin transaction fee to the network member who solves the block and adds that user’s
transaction to the blockchain to incentivize prioritizing that user’s transaction. Transaction fees are discretionary, so
if the transaction fees were to become the only or primary income for Bitcoin mining activities in the future, the expected economic
returns from Bitcoin mining and therefore the demand for our products will decrease significantly, which will result in a significant
negative impact on our business and results of operations.
Our
business growth is dependent on the development of blockchain technology and applications, particularly in the field of Bitcoin
We
derive our revenue predominantly from our blockchain products business. The development of blockchain technology is still in a
relatively early stage, and there can be no assurance that blockchain applications, including those in the fields of cryptocurrencies
and other areas such as AI, will gain wide market acceptance. Any blockchain application may become redundant or obsolete with
the introduction of new competing technologies or products. If market acceptance or confidence in blockchain technology is lost
or reduced for any reason, such as due to cybersecurity issues, the demand for our existing or future blockchain products may
decline.
Our
blockchain products business depends significantly on the development of cryptocurrency applications, in particular, Bitcoin applications,
as all of our mining machines are currently designed for Bitcoin mining. The cryptocurrency market is rapidly and continuously
evolving. Any actual or perceived adverse development in Bitcoin or other cryptocurrencies can significantly affect market demand
for mining activities and mining machines. In addition, any event or rumor that generates negative publicity for the cryptocurrency
market could hinder the development and reduce market acceptance of cryptocurrency applications. Under such circumstances, our
business, results of operations and financial condition could be materially and adversely affected.
Adverse
changes in the regulatory environment in the PRC market could have a material adverse impact on our blockchain products business
Our
revenue from sales in the PRC market accounted for 91.4%, 87.5% and 99.8% of our total revenue in 2018, 2019 and 2020, respectively.
Our blockchain products business could therefore be significantly affected by, among other things, the regulatory developments
in the PRC. Governmental authorities are likely to continue to issue new laws, rules and regulations governing the cryptocurrency
industry we operate in and enhance enforcement of existing laws, rules and regulations. For example, Xinjiang, an autonomous region
in northwest China, warned local Bitcoin mining enterprises that were operating illegally to close their operations before August 30,
2018 and the People’s Bank of China, or the PBOC, imposed a ban in September 2017 prohibiting financial institutions
from engaging in initial coin offering transactions. Some jurisdictions, including the PRC, restrict various uses of cryptocurrencies,
including the use of cryptocurrencies as a medium of exchange, the conversion between cryptocurrencies and fiat currencies or
between cryptocurrencies, the provision of trading and other services related to cryptocurrencies by financial institutions and
payment institutions, and initial coin offerings and other means of capital raising based on cryptocurrencies. In addition, cryptocurrencies
may be used by market participants for black market transactions, to conduct fraud, money laundering and terrorism-funding, tax
evasion, economic sanction evasion or other illegal activities. As a result, governments may seek to regulate, restrict, control
or ban the mining, use, holding and transferring of cryptocurrencies. We may not be able to eliminate all instances where other
parties use our products to engage in money laundering or other illegal or improper activities. We cannot assure you that we will
successfully detect all money laundering or other illegal or improper activities which may adversely affect our reputation, business,
financial condition and results of operations.
With
advances in technology, cryptocurrencies are likely to undergo significant changes in the future. It remains uncertain whether
Bitcoin will be able to cope with, or benefit from, those changes. In addition, as Bitcoin mining employs sophisticated and high
computing power devices that need to consume large amounts of electricity to operate, future developments in the regulation of
energy consumption, including possible restrictions on energy usage in the jurisdictions where we sell our products, may also
affect our business operations and the demand for our current Bitcoin mining machines. There has been negative public reaction
to surrounding the environmental impact of Bitcoin mining, particularly the large consumption of electricity, and governments
of various jurisdictions have responded. For example, in the United States, certain local governments of the state of Washington
have discussed measures to address the environmental impacts of Bitcoin-related operations, such as the high electricity consumption
of Bitcoin mining activities.
Furthermore,
we are in the process of developing mining machines for other cryptocurrencies, and we plan to expand our current mining machine
hosting services to establish mining farms which would allow us to engage in both hosting services for third parties and proprietary
Bitcoin and other cryptocurrency mining activities to mine cryptocurrencies for ourselves. We also intend to set up a cryptocurrency
trading exchange to provide cryptocurrency trading related services to cryptocurrency communities in the near feature in overseas
jurisdictions. However, relevant restrictions from existing and future regulations on mining, holding, using, or transferring
of cryptocurrencies may adversely affect our future business operations and results of operations. For example, although mining
activities have not been explicitly prohibited by the PRC government, any further order of the PRC government to limit cryptocurrency
mining may result in a crackdown on the cryptocurrency market and adversely affect our mining machine sales, potential mining
activities and other cryptocurrency-related businesses. Furthermore, as advised by our PRC legal advisor, the PRC government has
prohibited entities from establishing cryptocurrency exchanges and engaging in cryptocurrency trading businesses. Although we
plan to conduct potential cryptocurrency trading related services in overseas jurisdictions to the extent feasible, any further
order of the PRC government to block access to foreign platforms that enable centralized trading of cryptocurrencies in China
may materially and adversely affect our business expansion plans and prospects. It is possible that the cryptocurrency market
may respond to such regulations by moving to other countries or changing its practices to comply. However, it is unclear how various
countries will regulate the blockchain or how the market will respond to such regulations. If any jurisdictions impose limitations
on the mining, use, holding or transferring of cryptocurrencies or any cryptocurrency-related activity, our business prospects,
operations and financial results may be negatively impacted.
In
addition, our plan to expand our current mining machine hosting services to establish and operate mining farms, either for the
provision of hosting services to third parties or for our proprietary mining activities, may be affected adversely by laws and
regulations on securities and the financial regulatory environment in China and other jurisdictions we operate. For example, if
cryptocurrencies or the mining of cryptocurrencies are regarded or reclassified retroactively as securities by various governmental
authorities, our distribution of cryptocurrencies to potential members of our mining farms is likely to be deemed as issuance
of cryptocurrencies to investors for financing purpose and thus prohibited under the PRC laws. Any such regulations, if implemented,
will cause us to incur additional compliance costs and have a material adverse effect on our future business operations.
The
current regulatory environment in foreign markets, and any adverse changes in that environment, could have a material adverse
impact on our blockchain products business and our planned cryptocurrency exchange and financial service platform businesses
We currently export our products to various overseas markets and intend
to develop our business and operations in jurisdictions outside the PRC in the future. We also intend to set up cryptocurrency trading
exchanges outside the PRC to provide cryptocurrency trading related services to cryptocurrency communities, including, but not limited
to, Canada, Australia and Singapore. We currently have no plans to establish our cryptocurrency trading exchange or online brokerage businesses
in the United States. Our blockchain products business and planned cryptocurrency and financial services platform businesses could therefore
be significantly affected by regulatory developments in jurisdictions outside the PRC, including the United States and such other jurisdictions.
Although we have no immediate plans to operate such businesses in the United States, governmental authorities, including those in the
United States and such other jurisdictions, oversee certain aspects of the cryptocurrency markets, have taken actions based on current
laws and regulations, and are likely to continue to issue new laws, rules and regulations governing the cryptocurrency industry in which
we operate and may operate in the future. As a result, and as discussed further below, existing and future regulations affecting the mining,
holding, using, or transferring of cryptocurrencies may adversely affect our future business operations and results of operations, and
could even result in our or our customers’ liability for activities conducted by our customers.
As
described under “Item 4. Information on the Company—B. Business Overview—Regulation—Regulatory Overview
of United States,” United States federal and state securities laws may specifically limit our ability and the ability of
our customers to use our blockchain and telecommunications products where these operations are conducted in connection with cryptocurrencies
that are considered “securities” for purposes of U.S. law. We have begun developing new chips for mining cryptocurrencies
other than Bitcoin, and the likely status of these cryptocurrencies as securities could limit distributions, transfers, or other
actions involving such cryptocurrencies, including mining, in the United States. For example, the distribution of cryptocurrencies
to miners through the mining process could be deemed to involve an illegal offering or distribution of securities subject to federal
or state law. In addition, miners on cryptocurrency networks could, under certain circumstances, be viewed as statutory underwriters
or as “brokers” subject to regulation under the Securities Exchange Act of 1934. This could require us or our customers
to change, limit, or cease their mining operations, register as broker-dealers and comply with applicable law, or be subject to
penalties, including fines. In addition, we could have liability for facilitating their illegal activities.
Further,
cryptocurrencies are subject to additional U.S. laws and regulations related to transactions in commodities as enforced by the
Commodity Futures Trading Commission, or CFTC, and to money transmission, money service business, anti-money laundering, and know-your-customer
activities as enforced by the Department of the Treasury’s Financial Crimes Enforcement Network, or FinCEN, and by state
governments. We or our customers could be subject to regulatory restrictions or regulatory actions based on these laws and regulations.
Any
restrictions imposed by a foreign government could force us to restructure operations, perhaps significantly, which could result
in significant costs and inefficiencies that harm our profitability, or even cause us to cease operations in the applicable jurisdiction.
Cryptocurrency is a recent technological innovation and the regulatory schemes to which cryptocurrency and the related exchange
may be subject have not been fully explored or developed by foreign jurisdictions. Thus, cryptocurrency faces an uncertain regulatory
landscape in many foreign jurisdictions. Various foreign jurisdictions may from time to time adopt laws, regulations or directives
that affect our cryptocurrency businesses. Due in part to its international nature and the nascent stage of regulation, along
with the limited experience with cryptocurrency, and language barriers between international journalists, translators and regulators,
information regarding the regulation of cryptocurrency in various jurisdictions may be incomplete, inaccurate or unreliable. As
both the regulatory landscape develops and journalistic familiarity with cryptocurrency increases, mainstream media’s understanding
of cryptocurrency and the regulation thereof may improve. As we enter into the markets in Canada, Australia, and Singapore, we
expect to continue to monitor the local regulations regarding cryptocurrency and financial service platforms and retain local
regulatory counsels.
We
expect that regulation of our current and planned business operations will vary from country to country as well as within countries.
We cannot assure you that we will be familiar with local laws and regulations at all times when we establish cryptocurrency and
financial services platform businesses or develop any other business and operations in a foreign country. An increase in the regulation
of such operations may affect our proposed businesses by increasing compliance costs or prohibiting certain or all of our proposed
activities. In addition, existing and proposed laws and regulations can delay or impede the development of new products, result
in negative publicity, decrease demand for our products, require significant management time and attention, and subject us to
claims or other remedies, including fines or demands that we modify or cease existing business practices.
In
addition, any action brought against us or our customers by a foreign regulator, or by an individual in a private action, based
on foreign law could cause us or our customers to incur significant legal expenses and divert our management’s attention
from the operation of the business. If our or our customers’ operations are found to be in violation of any laws and regulations,
we or they may be subject to penalties associated with the violation, including civil and criminal penalties, damages and fines.
This could in turn require us to curtail or cease all or some operations. Regulatory action or regulatory change could also decrease
demand for our products and services, which would be harmful to the success of our business.
If
we are unable to manage our growth or execute our strategies effectively, our business, results of operations and financial condition
may be materially and adversely affected
We
are in the process of developing ICs for mining other cryptocurrencies in order to adapt our future models of mining machines
to other cryptocurrencies promptly and efficiently when all the Bitcoins have been discovered or Bitcoin is replaced by other
cryptocurrencies as the mainstream cryptocurrency. We began to provide mining machine hosting services in 2017 and intend to leverage
our experience in the mining machine industry to establish mining farms and provide cryptocurrency trading-related services to
the cryptocurrency community in order to diversify our offerings. We also intend to set up cryptocurrency trading exchanges outside
the PRC to provide cryptocurrency trading related services to cryptocurrency communities, including, but not limited to, Canada,
Australia and Singapore, which we have been developing since August 2020. We may fail to successfully execute our expansion plan
due to our limited resources and other reasons beyond our control. For example, the gain we obtain from running mining farms may
not cover their operating expenses due to a prolonged depression of cryptocurrency prices, and our cryptocurrency trading related
services may be unable to compete effectively with other similar services already available to the cryptocurrency community. Should
we fail to successfully manage our growth or implement our strategies, the resources we allocate to the new business lines will
be wasted, and our business, results of operations and financial condition could be materially and adversely affected.
Each
of our subsidiaries in Canada, Australia and Singapore have a limited operating history, which makes it hard for us to evaluate
their ability to generate revenue through operations, and to date, each of them has not generated revenue from any commercially
available blockchain-based products or services
Our
subsidiaries in Canada, Australia and Singapore were recently formed from August to October 2020 for the purpose of establishing
our cryptocurrency exchanges and online brokerages. Their limited operating history and the relative immaturity of the blockchain
industry make it difficult for us to evaluate their current business and future prospects. They have encountered, and will continue
to encounter, risks and difficulties frequently experienced by growing companies in rapidly developing and changing industries,
including challenges in forecasting accuracy, determining appropriate uses of their limited resources, gaining market acceptance,
managing a complex and evolving regulatory landscape and developing new products. These subsidiaries’ current or future
operating model may require changes in order for them to scale their operations efficiently and be successful. Investors in our
securities should consider the business and prospects of our overseas subsidiaries in these countries in light of the risks and
difficulties they face as early-stage companies focused on developing products in the field of financial technology.
The
development and operation of our cryptocurrency exchanges and online brokerages will likely require, technology and intellectual
property rights
The
ability of to operate our cryptocurrency exchanges and online brokerages may depend on technology and intellectual property rights
that we may license from unaffiliated third parties. If for any reason we fail to comply with our obligations under an applicable
license agreement, or are unable to provide or fail to provide the technology and intellectual property that we or any licensee
requires, our operations would be negatively affected, which would have a material adverse effect on our operations and financial
condition.
We
may not successfully develop, market or launch any cryptocurrency exchanges or online brokerages
We
have established wholly-owned subsidiaries in Singapore, Canada and Australia in preparation for establishing cryptocurrency exchanges
since August 2020. In September 2020, we have received the Money Service Business License from the Financial Transactions and
Reports Analysis Centre of Canada, which will allow us to engage in foreign exchange trading, digital currency transferring and
dealing in virtual currencies in Canada, and we are in the process of applying for relevant licenses and approvals for our subsidiaries
in Singapore and Australia. However, we are only at an initial preparatory stage of executing our plan to launch blockchain-enabled
financial business or online brokerages. Also, there is no guarantee that we will receive any additional required approvals and
licenses for our proposed business in Singapore, Canada and Australia in a timely manner or on commercially reasonable terms,
or at all, or that we will commence the proposed business as planned, or at all. Our current plan is to launch our operations
in these countries in early 2022. However, if our expectations as to the costs and timelines of our investment and operations
at these countries or our execution of business plan prove incorrect, we may incur additional expenses or losses. Additionally,
as we have limited experience in operating the proposed business, we will need to obtain additional management, regulatory compliance
technical expertise and devote substantial time and effort to these initiatives, which may not be as profitable as we expected
or at all. We also need to obtain additional capital resources to pursue development of cryptocurrency exchanges or online brokerages,
and we may not be successful in raising that capital. In addition, we may face relevant restrictions from existing and future
regulations in connection with our expansion into this new line of business. While we have been closely monitoring the development
of the relevant regulations and have been in communication with regulatory authorities, this new business initiative may not be
viable due to regulatory concerns. Our plan to develop, market or launch any cryptocurrency exchanges or online brokerages may
suffer significant delays in our efforts and may ultimately not be successful. It is possible that the launch of our cryptocurrency
exchanges and/or online brokerages may never occur, and even if the proposed business is successfully developed, it is possible
that it will not be accessed or utilized by a sufficient number of users or will otherwise not achieve viable business scale or
market acceptance.
If
Bitcoin is replaced by other cryptocurrencies as the mainstream cryptocurrency, we will lose the market for our current mining
machines and our results of operations will be materially and adversely affected
Although
we have begun to develop new chips for mining other cryptocurrencies, all of our revenue from sales of cryptocurrency mining machines
was generated from the sale of mining machines designed for Bitcoin mining in 2018, 2019 and 2020. We face the risk that other
cryptocurrencies could replace Bitcoin as the largest cryptocurrency, which may in turn negatively impact the value of Bitcoin
and diminish interest in mining Bitcoin. Acceptance of Bitcoin may decline due to various reasons such as the following:
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potential changes
in Bitcoin’s algorithms or source code may negatively impact user acceptance;
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patches, upgrades,
attacks or hacking of Bitcoin’s infrastructure may undermine user interest or confidence;
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usage of Bitcoin
for illicit or illegal activities by bad actors may erode public perception of Bitcoin; or
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hacking, fraud or
other problems with Bitcoin exchanges, wallets or other related infrastructure may negatively impact user confidence.
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If
fewer people accept Bitcoin currency or fewer merchants accept Bitcoin as a payment method, Bitcoin may decline in value. Although
Bitcoin is currently the largest cryptocurrency by market capitalization, a substantial amount of Bitcoin-related transactions
may be speculation-related and a technological breakthrough in the form of a better cryptocurrency is a continuous threat. Other
cryptocurrencies may be designed with algorithms that are not compatible with the kind of computing done by ASIC chip mining machines.
If such a cryptocurrency were to become dominant, our existing technological know-how may not be applicable in creating hardware
for participants in that cryptocurrency network, and we may face greater competition from new players. In addition, since the
value of and support for Bitcoin depend entirely on the community using it, any disagreement between the users may result in the
splitting of the network to support other cryptocurrencies and the users may sell all their Bitcoins and switch to other cryptocurrencies.
As a result, our mining machines and our results of operations would be materially and adversely affected.
We
rely on a limited number of third parties to fabricate our ASIC chips, which are the core technology used in our mining machines
The
ASIC chip is the key component of a mining machine as it determines the efficiency of the device. Currently, only a small number
of wafer foundries in the world are capable of producing the highly sophisticated silicon wafers used for ASIC chips. Therefore,
the ability to source high-quality wafers is a major barrier to entry for new entrants and has provided us with a great competitive
advantage in the market.
In
2018 and 2019, all of our ASIC wafers were fabricated by Samsung. We have historically purchased ASIC wafers through a supply
arrangement with an intermediary that directly purchases ASIC chips from Samsung as Samsung’s approved customer. Such intermediary
was our largest supplier in 2018. We principally purchased ASIC chips either directly from Samsung or through another intermediary
that purchased from Samsung in 2019 and 2020. We have entered into an agreement with Samsung, effective May 2018, for developing
ASIC chips, and we are working directly with Samsung on a development project for our second generation 10 nm ASIC chip. However,
this agreement does not guarantee that Samsung will reserve foundry capacity for us, which we believe is in line with market arrangements
with other wafer foundries. As such, there are risks that Samsung may be unable to accept our purchase orders or continue their
supply of ASIC wafers to us. Such changes may result in delays to our production, which could negatively affect our reputation
and results of operations.
In
order to reduce our reliance on Samsung, we have established working relations with Taiwan Semiconductor Manufacturing Company,
Limited, or TSMC, since November 2017 and are in discussions with other major wafer foundries for possible future orders. However,
we cannot guarantee that we will be able to continue to source ASIC wafers from Samsung or TSMC on the same or similar terms or
in a timely manner, or start to source ASIC wafers from other suppliers. In addition, replacing a supplier may require that we
divert attention and resources away from our business. We may also suffer lower gross profit margins if we fail to pass on any
additional costs to our customers. As a result, a change in our relationship with Samsung or TSMC could have a significant negative
impact on our business, financial condition and results of operation.
We
depend on a limited number of suppliers to allocate to us a portion of their manufacturing capacity sufficient to meet our needs,
to produce products of acceptable quality and at acceptable final test yields, and to deliver those products to us on a timely
basis and at acceptable prices. These suppliers may raise prices or may be unable to meet our required capacity for any reason,
such as shortages or delays in the shipment of semiconductor equipment or raw materials required to manufacture our ICs. In addition,
our business relationships with them may deteriorate. For example, in November 2019, we brought a legal action against a then-major
supplier for breach of contract for delivering defective products. Under such circumstances, we may not be able to obtain the
required capacity and would have to seek alternative suppliers, which may not be available on commercially reasonable terms, or
at all. Moreover, it is possible that other customers of these suppliers that are larger and/or better financed than we are, or
that have long-term contracts with them, may receive preferential treatment in terms of capacity allocation or pricing. In addition,
if we do not accurately forecast our capacity needs, these suppliers may not have available capacity to meet our immediate needs
or we may be required to pay higher costs to fulfill those needs, either of which could materially and adversely affect our business,
financial condition and results of operations.
In
particular, the production of our ASICs may require advanced IC fabrication technologies. Foundries other than Samsung or TSMC,
however, might not have sufficient production capacity for such technologies, or at all, to meet our requirements. This may expose
us to risks associated with engaging new foundries. For example, using foundries with which we have not established relationships
could expose us to potentially unfavorable pricing, unsatisfactory quality or insufficient capacity allocation.
Other
risks associated with the concentration of third-party foundry suppliers include limited control over delivery schedules and quality
assurance, lack of capacity in periods of excess demand, unauthorized use of our intellectual property and limited ability to
manage inventory and parts. In particular, although we have entered into confidentiality agreements with our third-party foundry
suppliers for the protection of our intellectual property, it may not protect our intellectual property with the same degree of
care as we use to protect our intellectual property. If we fail to properly manage any of these risks, our business and results
of operations may be materially and adversely affected. Moreover, if Samsung or TSMC suffers any damage to its facilities, suspends
manufacturing operations, loses benefits under material agreements, experiences power outages or computer virus attacks, lacks
sufficient capacity to manufacture our products, encounters financial difficulties, is unable to secure necessary raw materials
from its suppliers or suffers any other disruption or reduction in efficiency, we may encounter supply delays or disruptions.
Further, the recent trade disputes between Japan and South Korea could materially and adversely affect Samsung’s supply
of ASIC wafers. In July 2019, Japan decided to restrict exports to South Korea of certain materials used in memory chips. Such
measures created massive pressures on the production activities of Samsung. If such trade tensions continue escalating without
a resolution and Samsung cannot secure alternative supply of key materials that are banned by Japan, Samsung’s ability to
supply us with adequate ASIC wafers, which are the core components of our mining machines, may be jeopardized, and as a result,
our business and results of operations may be materially and adversely affected.
Failure
at tape-out or failure to achieve the expected final test yields for our ASIC chips could negatively impact our results of operations
The
tape-out process is a critical milestone in our business. A successful tape-out means all the stages in the design and verification
process of our ASIC chips have been completed, and the chip design is ready to be sent for manufacturing. The tape-out process
requires considerable investment in time and resources and close cooperation with the wafer foundry, and repeated failures can
significantly increase our costs, lengthen our product development period and delay our product launch. If the tape-out or testing
of a new ASIC chip design fails, either as a result of design flaws by our research and development team or problems with production
or the testing process by the wafer foundry, we may incur considerable costs and expenses to fix or restart the design process.
Such obstacles may decrease our profitability or delay the launch of new products.
Once
tape-out is successful, the ASIC design is sent for manufacturing, and the final test yield is a measurement of the production
success rate. The final test yield is a function of both product design, which is developed by us, and process technology, which
typically belongs to a third-party foundry, such as Samsung and TSMC in our case. Low final test yields can result from a product
design deficiency or a process technology failure or a combination of both. As such, we may not be able to identify problems causing
low final test yields until our product designs go to the manufacturing stage, which may substantially increase our per unit costs
and delay the launch of new products.
For
example, if either Samsung or TSMC experiences manufacturing inefficiencies or encounters disruptions, errors or difficulties
during production, we may fail to achieve acceptable final test yields or experience product delivery delays. We cannot guarantee
that Samsung and TSMC will be able to develop, obtain or successfully implement process technologies needed to manufacture future
generations of our mining machines on a timely basis. Moreover, during the periods in which foundries are implementing new process
technologies, their manufacturing facilities may not be fully productive. A substantial delay in the technology transitions to
smaller geometry process technologies could have a material and adverse effect on us, particularly if our competitors transition
to such technologies before us.
In
addition, resolution of yield problems requires cooperation among us, Samsung or TSMC, and packaging and testing partners. We
cannot assure you that the cooperation will be successful and that any yield problem can be fixed.
If
any person, institution or a pool of them acting in concert obtains control of more than 50% of the processing power active on
the Bitcoin network, such person, institution or a pool of them could prevent new transactions from gaining confirmations, halt
payments between users, and reverse previously completed transactions, which would erode user confidence in Bitcoin
If
the award of Bitcoins for solving blocks and transaction fees for recording transactions are not sufficiently high to incentivize
miners, miners may cease expending processing power to solve blocks. Miners ceasing operations would reduce the collective processing
power on the Bitcoin network, which would adversely affect the confirmation process for transactions and make the Bitcoin network
more vulnerable to any person, institution or a pool of them which has obtained over 50% control over the computing power on the
Bitcoin network. In such event, such person, institution or a pool of them could prevent new transactions from gaining confirmation,
halt payments between users, and reverse previously completed transactions. Such changes or any reduction in confidence in the
confirmation process or processing power of the Bitcoin network may erode user confidence in Bitcoin, which would decrease the
demand for our products.
The
decentralized nature of Bitcoin may be subject to challenges, which could negatively affect our results of operations
A
key reason for Bitcoin and other cryptocurrencies to have attracted many new and committed users in a short period of time is
its decentralized nature, or the lack of control by a central authority. However, there are divergent views on the decentralized
nature of cryptocurrencies. For example, there are claims that most of the actual services and businesses built within the Bitcoin
ecosystem are in fact centralized since they are run by specific people, in specific locations, with specific computer systems,
and that they are susceptible to specific regulations. Individuals, companies or groups, as well as Bitcoin exchanges that control
vast amounts of Bitcoin can affect the market price of Bitcoin. Furthermore, mining equipment production and mining pool locations
may become centralized. The concerns or skepticism about the decentralized nature of Bitcoin may cause customers to lose confidence
in the Bitcoin industry’s prospects. This in turn could adversely affect the market demand for our mining machines and our
business. Furthermore, the possibility that a person or a coordinated group of people may gain more than 50% control of the process
power active on Bitcoin and be able to manipulate transactions, despite the intended decentralized structure, may also erode confidence
in Bitcoin. Our business, prospects and results of operations therefore may adversely be affected by the divergent views on the
decentralized nature of Bitcoin.
Change
of Bitcoin algorithms and mining mechanisms may materially and adversely affect our business and results of operations
Our
ASIC chips are designed for proof-of-work, or POW, mechanism, which the Bitcoin network uses to validate Bitcoin transactions.
Many people within the Bitcoin community believe that POW is a foundation within Bitcoin’s code that would not be changed.
However, there have been debates on mechanism change to avoid the “de facto control” by a great majority of the network
computing power. With the possibility of a change in rule or protocol of the Bitcoin network, if our Bitcoin mining machines cannot
be modified to accommodate any such changes, our mining machines will not be able to meet customer demand, and the results of
our operations will be significantly affected. For more details, see “Item 3. Key Information—D. Risk Factors—Risks
Relating to Our Cryptocurrency, Blockchain and Mining Related Businesses—The administrators of the Bitcoin network’s
source code could propose amendments to the Bitcoin network’s protocols and software that, if accepted and authorized by
the Bitcoin network’s community, could adversely affect our business, results of operations and financial condition”
and “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Cryptocurrency, Blockchain and Mining Related
Businesses—The acceptance of Bitcoin network software patches or upgrades by a significant, but not overwhelming, percentage
of the users and miners in the Bitcoin network could result in a “fork” in the blockchain, resulting in the operation
of two separate networks that cannot be merged. The existence of forked blockchains could erode user confidence in Bitcoin and
could adversely impact our business, results of operations and financial condition.”
We
face risks associated with the expansion of our blockchain products business operations overseas and if we are unable to effectively
manage such risks, our business growth and profitability may be negatively affected
We
intend to grow our blockchain products business in part by expanding our sales network and operations internationally beyond China.
Our expansion plans include possibly establishing an assembly facility and offices for sales, research and development and other
operations in the United States and the European Union. However, there are risks associated with such global expansion plans,
including:
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high costs of investment
to establish a presence in a new market and manage international operations;
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competition in unfamiliar
markets;
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foreign currency
exchange rate fluctuations;
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regulatory differences
and difficulties in ensuring compliance with multi-national legal requirements and multi-national operations;
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changes in economic,
legal, political or other local conditions in new markets;
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our limited customer
base and limited sales and relationships with international customers;
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competitors in the
overseas markets may be more dominant and have stronger ties with customers and greater financial and other resources;
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challenges in managing
our international sales channels effectively;
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difficulties in
and costs of exporting products overseas while complying with the different commercial, legal and regulatory requirements
of the overseas markets in which we offer our products;
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difficulty in ensuring
that our customers comply with the sanctions imposed by the Office of Foreign Assets Control, or OFAC, on various foreign
states, organizations and individuals;
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inability to obtain,
maintain or enforce intellectual property rights;
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inability to effectively
enforce contractual or legal rights or intellectual property rights in certain jurisdictions under which we operate; and
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governmental policies
favoring domestic companies in certain foreign markets or trade barriers including export requirements, tariffs, taxes and
other restrictions and charges. In particular, a worldwide trend in favor of nationalism and protectionist trade policy and
the ongoing trade dispute between the United States and China as well as other potential international trade disputes could
cause turbulence in international markets. These government policies or trade barriers could increase the prices of our products
and make us less competitive in such countries.
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If
we are unable to effectively manage such risks, we may encounter difficulties in our overseas expansion plans and our business,
reputation, results of operations and financial condition may be impaired.
We
plan to increase our export of mining machines to the United States and the European Union in the future, which may be subject
to high tariff rates resulting from protectionism trade policies, and as a result, our future sales volumes, profitability and
results of operations will be materially and adversely affected
Historically,
only a small portion of our mining machines were exported to the United States. Going forward we plan to increase our export of
mining machines to the U.S. market. However, the United States and China have recently been involved in controversy over trade
barriers in China that have threatened a trade war between these two countries, and have implemented or proposed to implement
tariffs on certain imported products. Though the United States had not announced any trade policies that may directly impact the
export of our mining machines as of the date of this annual report, we cannot accurately predict whether any anti-dumping duties,
tariffs or quota fees will be imposed on our mining machines by the United States in the future. Any export requirements, tariffs,
taxes and other restrictions and charges imposed by the United States on our mining machines could significantly increase our
customers’ purchase costs of our mining machines and make our mining machines less competitive in the U.S. market. As a
result, our future sales volumes, profitability and results of operations could be adversely affected.
In
addition, we also intend to increase our export of mining machines to the European Union in the future. However, the worldwide
populism trend that calls for protectionism trade policy and potential international trade disputes could cause turbulence in
the international markets. These government policies or trade barriers could increase the prices of our mining machines and cause
us to lose our sales and market share to our competitors in these countries.
We
may be unable to make the substantial research and development investments that are required to remain competitive in our business
Advances
in blockchain technology and AI technology have led to increased demand for ICs of higher speed and power efficiency for solving
computational problems of increasing complexity. We intend to broaden our product offerings to include other applications. We
are committed to investing in new product development in order to stay competitive in our markets. Driven by market demand, we
intend to continue to broaden and enhance our product portfolio in order to deliver the most effective products to our customers.
Nevertheless, if we are unable to generate enough revenue or raise enough capital to make adequate research and development investments
going forward, our product development and relevant research and development initiatives may be restricted or delayed, or we may
not be able to keep pace with the latest market trends and satisfy our customers’ needs, which could materially and adversely
affect our results of operations. Furthermore, our substantial research and development expenditures may not yield the expected
results that enable us to roll out new products, which in turn will harm our prospects and results of operations.
Our
blockchain customers rely on a steady and inexpensive power supply for operating mining farms and running mining hardware. Failure
to access a large quantity of power at reasonable costs could significantly increase their operating expenses and adversely affect
their demand for our mining machines
Many
of our blockchain customers engage in the cryptocurrency mining business. Cryptocurrency mining consumes a significant amount
of energy power to process the computations and cool down the mining hardware. Therefore, a steady and inexpensive power supply
is critical to cryptocurrency mining. There can be no assurance that the operations of our blockchain customers will not be affected
by power shortages or an increase in energy prices in the future. In particular, the power supply could be disrupted by natural
disasters, such as floods, mudslides and earthquakes, or other similar events beyond the control of our customers. Further, certain
of our customers may experience power shortages due to seasonal variations in the supply of certain types of power such as hydroelectricity.
Power shortages, power outages or increased power prices could adversely affect mining farm businesses of our blockchain customers
and reduce the expected market demand for our mining machines significantly. Under such circumstances, our business, results of
operations and financial condition could be materially and adversely affected.
In
addition, as we provide mining machine hosting services to our customers and intend to establish and operate mining farms to provide
hosting services for third parties and engage in proprietary Bitcoin and other cryptocurrency mining activities to mine cryptocurrencies
for ourselves in the near future, any increase in energy prices or a shortage in power supply in locations where our future mining
farms are located may increase our potential mining costs and reduce the expected economic returns from our proprietary mining
operation significantly.
We
rely on a limited number of third parties for IC packaging and testing services
Fabrication
of IC chips requires specialized services to process the silicon wafers into IC chips by packaging them and to test their proper
functioning. We rely on a limited number of production partners for such packaging and testing services. We have worked closely
with world-class outsourced semiconductor assembly and test, or OSAT, companies on a limited number of specialized production
partners exposes us to a number of risks, including difficulties in finding alternate suppliers, capacity shortages or delays,
lack of control or oversight in timing, quality or costs, and misuse of our intellectual property. If any such problems arise
with our OSAT partners, we may experience delays in our production and delivery timeline, inadequate quality control of our products
or excessive costs and expenses. As a result, our financial condition, results of operation, reputation and business may be adversely
affected.
Cryptocurrencies
face significant scaling obstacles that can lead to high fees or slowed transaction settlement times, and attempts to increase
the transaction processing capacity may not be effective
Many
cryptocurrency networks face significant scaling challenges. A number of solutions have been promoted recently to resolve this
problem, including segregated witness, Lightening Network and the introduction of Bitcoin Cash. However, there is no assurance
that the cryptocurrencies community will accept these solutions or these solutions will effectively resolve these problems.
As
the use of cryptocurrency networks increases without a corresponding increase in throughput of the networks, average fees and
settlement times can increase significantly. Bitcoin’s network, for example, has been, at times, at capacity, which has
led to very high transaction fees. Increased fees and decreased settlement speeds could preclude certain use cases for Bitcoins
(e.g., micropayments), and can reduce demand for and the market price of Bitcoins, which could adversely affect the market demand
for our mining machines. There is no guarantee that any of the mechanisms in place or being explored for increasing the scale
of settlement of Bitcoin transactions will be effective, or how long they will take to become effective, which could adversely
affect the market demand for our mining machines.
Cryptocurrency
exchanges and wallets, and to a lesser extent, a cryptocurrency blockchain itself, may suffer from hacking and fraud risks, which
may adversely erode user confidence in cryptocurrencies and reduce demand for our mining machines
Cryptocurrency
transactions are entirely digital and, as with any virtual system, face risk from hackers, malware and operational glitches. For
example, hackers can target cryptocurrency exchanges, wallets, and custodians to gain unauthorized access to the private keys
associated with the wallet addresses where cryptocurrencies are stored. Cryptocurrency transactions and accounts are not insured
by any type of government program and cryptocurrency transactions generally are permanent by design of the networks. Certain features
of cryptocurrency networks, such as decentralization, the open source protocols, and the reliance on peer-to-peer connectivity,
may increase the risk of fraud or cyber-attack by potentially reducing the likelihood of a coordinated response. Cryptocurrencies
have suffered from hacking risks and several cryptocurrency exchanges and miners have reported cryptocurrency losses, which highlight
concerns over the security of cryptocurrencies and in turn affect the demand and the market price of cryptocurrencies. In addition,
while cryptocurrencies use private key encryption to verify owners and register transactions, fraudsters and scammers may attempt
to sell false cryptocurrencies. These risks may adversely affect the operation of the cryptocurrency network which would erode
user confidence in cryptocurrencies, which would negatively affect demand for our mining machines.
The
administrators of the Bitcoin network’s source code could propose amendments to the Bitcoin network’s protocols and
software that, if accepted and authorized by the Bitcoin network’s community, could adversely affect our business, results
of operations and financial condition
The
Bitcoin network is based on a cryptographic, algorithmic protocol that governs the end-user-to-end-user interactions between computers
connected to the Bitcoin network. A loosely organized group can propose amendments to the Bitcoin network’s source code
through one or more software upgrades that alter the protocols and software that govern the Bitcoin network and the properties
of Bitcoins, including the irreversibility of transactions and limitations on the mining of new Bitcoins. To the extent that a
significant majority of the users and miners on the Bitcoin network install such software upgrade(s), the Bitcoin network would
be subject to new protocols and software that may render our mining machines less desirable, which in turn may adversely affect
our business, results of operations and financial condition. If less than a significant majority of the users and miners on the
Bitcoin network install such software upgrade(s), the Bitcoin network could “fork.”
The
acceptance of Bitcoin network software patches or upgrades by a significant, but not overwhelming, percentage of the users and
miners in the Bitcoin network could result in a “fork” in the blockchain, resulting in the operation of two separate
networks that cannot be merged. The existence of forked blockchains could erode user confidence in Bitcoin and could adversely
impact our business, results of operations and financial condition
Bitcoin
is based on open source software and has no official developer or group of developers that formally controls the Bitcoin network.
Any individual can download the Bitcoin network software and make any desired modifications, which are proposed to users and miners
on the Bitcoin network through software downloads and upgrades. However, miners and users must consent to those software modifications
by downloading the altered software or upgrade implementing the changes; otherwise, the changes do not become part of the Bitcoin
network. Since the Bitcoin network’s inception, changes to the Bitcoin network have been accepted by the vast majority of
users and miners, ensuring that the Bitcoin network remains a coherent economic system. However, a developer or group of developers
could potentially propose a modification to the Bitcoin network that is not accepted by a vast majority of miners and users, but
that is nonetheless accepted by a substantial population of participants in the Bitcoin network. In such a case, a fork in the
blockchain could develop and two separate Bitcoin networks could result, one running the pre-modification software program and
the other running the modified version. An example is the introduction of Bitcoin Cash in mid-2017. This kind of split in the
Bitcoin network could erode user confidence in the stability of the Bitcoin network, which could negatively affect the demand
for our mining machines.
Our
Bitcoin mining machines use open source software and hardware as their basic controller system, which may subject us to certain
risks
We
use open source software and hardware in our Bitcoin mining machines. For example, our mining machine controller open source software
needs to be installed on open source, which serves as the basic controller system for our mining machines, and we expect to continue
to use open source software and hardware in the future. We may face claims from others claiming ownership of, or seeking to enforce
the terms of, an open source license, including by demanding the release of the open source software, derivative works or our
proprietary source code that was developed using such software. These claims could also result in litigation, requiring us to
purchase a costly license or to devote additional research and development resources to change our technologies, either of which
would have a negative effect on our business and operating results. In addition, if the license terms for the open source software
we utilize change, we may be forced to re-engineer or discontinue our solutions or incur additional costs.
Cryptocurrency
assets and transactions may be subject to further taxation in the future
In
recent years, the rise of cryptocurrency prices and transaction volume has attracted the attention of tax authorities. As the
laws governing cryptocurrencies are still evolving, the tax treatment of cryptocurrencies in various jurisdictions are subject
to change. While some countries intend to or have imposed taxation on cryptocurrency assets and transactions, other tax authorities
are silent. As there is considerable uncertainty over the taxation of cryptocurrencies, we cannot guarantee that the cryptocurrency
assets and transactions denominated in cryptocurrencies will not be subject to further taxation in the future, including but not
limited to additional taxes and increased tax rate. These events could reduce the economic return of cryptocurrency and increase
the holding costs of cryptocurrency assets, which could materially and adversely affect the businesses and financial performances
of our blockchain customers engaging in cryptocurrency mining businesses, and in turn could have material adverse effect on our
business and results of operations.
In
addition, as we intend to establish operating mining farms, which will allow us to engage in both mining machine hosting services
for third parties and proprietary Bitcoin and other cryptocurrency mining activities to mine cryptocurrencies for ourselves in
the near future, these events could also reduce the expected economic returns from our proprietary mining operation significantly.
Bitcoin
mining activities are energy-intensive, which may restrict the geographic locations of miners and have a negative environmental
impact
Bitcoin
mining activities are inherently energy-intensive and electricity costs account for a significant portion of the overall mining
costs. The availability and cost of electricity will restrict the geographic locations of mining activities. Any shortage of electricity
supply or increase in electricity cost in a jurisdiction may negatively impact the viability and the expected economic return
for Bitcoin mining activities in that jurisdiction, which may in turn decrease the sales of our Bitcoin mining machines in that
jurisdiction.
In
addition, the significant consumption of electricity may have a negative environmental impact, including contribution to climate
change, which may give rise to public opinion against allowing the use of electricity for Bitcoin mining activities or government
measures restricting or prohibiting the use of electricity for Bitcoin mining activities. Any such development in the jurisdictions
where we sell our Bitcoin mining machines could lower the demand for our products, which in turn would have a material and adverse
effect on our business, financial condition and results of operations.
Other
Risks Relating to Our Business Operations
The
global coronavirus COVID-19 outbreak has caused significant disruptions in our business, which we expect may continue to materially
and adversely affect our results of operations and financial condition
The
outbreak of COVID-19 has spread throughout the world. On March 11, 2020, the World Health Organization declared the outbreak a
global pandemic. Many businesses and social activities in China and other countries and regions have been severely disrupted in
the first quarter of 2020, including those of our suppliers, customers and employees. This global outbreak has also caused market
panics, which materially and negatively affected the global financial markets, such as the plunge of global stocks on major stock
exchanges in March 2020. Such disruption and the potential slowdown of the world’s economy in 2020 and beyond could have
a material adverse effect on our results of operations and financial condition. We and our customers experienced and may continue
to experience significant business disruptions and suspension of operations due to quarantine measures to contain the spread of
the pandemic, which may cause shortage in the supply of raw materials, reduce our production capacity, increase the likelihood
of default from our customers and delay our product delivery. The pandemic has also led to great volatility in the Bitcoin price,
which may negatively affect the demand for our mining machines both in terms of the price and the quantity.
Our
business operation was also disrupted, and may continue to be disrupted, if any of our employees are suspected of having contracted
any contagious disease or condition, since it could require our employees to be quarantined or our offices and production to be
closed down and disinfected. In 2020, the pandemic disrupted logistics necessary to import and export and slowed down our expansions.
The overall production capacity for silicon wafers decreased due to shutdown of the factories and shelter-in-place orders issued
by the governments. Our research and development facilities in Wuhan and Shanghai were closed until late 2020 and we paused research
and development activities for months in early 2020. All of these had, and may continue to, have a material adverse effect on
our results of operations and financial condition in the near term. We are closely monitoring the development of the COVID-19
pandemic and continuously evaluating any further potential impact on our business, results of operations and financial condition,
which we believe will depend on the duration and degree of the pandemic. If the outbreak persists or escalates, we may be subject
to further negative impact on our business operations and financial condition.
High
customer concentration exposes us to all of the risks faced by our major customers and may subject us to significant fluctuations
or declines in revenues
Our
customers include both enterprises and individuals. A limited number of our major customers, however, have contributed a significant
portion of our revenues in the past. Our revenue from the top three largest customers accounted for approximately 34%, 34% and
50% of our total revenues in 2018, 2019 and 2020, respectively. Our revenue from the top ten largest customers accounted for approximately
57%, 58% and 91% of our total revenues in 2018, 2019 and 2020. Although we continually seek to diversify our customer base, we
cannot assure you that the proportion of the revenue contribution from these customers to our total revenues will decrease in
the near future. We offer credit sales to our major, long-term customers. Dependence on a limited number of major customers will
expose us to the risks of substantial losses and may increase our account receivables and extend its turn over days if any of
them reduces or even ceases business collaborations with us. Specifically, any one of the following events, among others, may
cause material fluctuations or declines in our revenues and have a material and adverse effect on our business, financial condition,
results of operations and prospects:
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an overall decline
in the business of one or more of our significant customers;
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the decision by
one or more of our significant customers to switch to our competitors;
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the reduction in
the prices of our mining machines agreed by one or more of our significant customers; or
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the failure or inability
of any of our significant customers to make timely payment for our services.
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If
we fail to maintain relationships with these major customers, and if we are unable to find replacement customers on commercially
desirable terms or in a timely manner or at all, our business, financial condition, results of operations and prospects may be
materially and adversely affected.
We
have been involved, and may continue to be involved, in disputes, claims or proceedings arising from our operations or class actions
from time to time, which could result in significant liabilities and reputational harm and could materially and adversely affect
our business, financial condition and results of operations
We
have been, and in the future may continue to be, involved in disputes, claims or proceedings arising out of our operations. For
example, we are currently involved in several ongoing civil actions in relation to our sales of mining machines to several customers
and our procurement of ASIC wafers from a supplier. See “Item 4. Information on the Company—B. Business Overview —Legal
Proceedings.” In addition, we may have disagreements with regulatory bodies in the course of our operations, which may subject
us to administrative proceedings and unfavorable orders, directives or decrees that may result in financial losses. Ongoing disputes,
claims or proceedings may divert our management’s attention and consume their time and our other resources.
In the past, shareholders
of public companies have often brought securities class action suits against an issuer following periods of instability in the market
price of an issuer’s securities, or after the publication of third-party research reports. Recently, a negative research report
was published about us by Hindenburg Research in April 2021. Currently, we have been made aware of one or more classes of purported plaintiffs
threatening or having filed lawsuits. As of the date of this annual report, we have not been formally served. If properly served, we plan
to vigorously defend. However, any such class action suit, whether or not successful, could harm our reputation and restrict our ability
to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages,
which could have a material adverse effect on our financial condition and results of operations. Furthermore, any disputes, claims or
proceedings which are initially not of material importance may escalate and become important to us, due to a variety of factors, such
as the facts and circumstances of the cases, the likelihood of loss, the monetary amount at stake and the parties involved. As of the
date of this annual report, we are not able to quantify the likelihood or amount of exposure from any of these potential actions.
Negative
publicity arising from disputes, claims or proceedings may damage our reputation and adversely affect the image of our brands
and products. In addition, if any verdict or award is rendered against us, we could be required to pay significant monetary damages,
assume other liabilities and even to suspend or terminate the related business ventures or projects. Consequently, our business,
results of operations and financial condition may be materially and adversely affected.
The
average selling prices of certain products may decrease from time to time due to technological advancement and we may not be able
to pass onto our suppliers such decreases, which may in turn adversely affect our profitability
The IC design industry is
characterized by rapid launches of new products, continuous technological advancements and changing market trends and customer preferences,
all of which translate to a shorter life cycle and a decrease in the average selling prices of products over time. For example, the average
selling price per unit for our E12 bitcoin mining machines decreased from US$948 in 2019 to US$681 in 2020, and the average selling price
per TH/s decreased from US$22 in 2019 to US$15 in 2020. Because we compete in the environment of rapidly-evolving technology advancement
and market trends and developments of the IC design industry, we cannot assume you that we will be able to pass on any decrease in average
selling prices of our products to our suppliers. If the average selling prices of our products unusually or significantly decrease and
such decreases cannot be offset by a corresponding decrease in the prices of the principal components of our products, our gross profit
margins may be materially and adversely affected, which in turn, may adversely affect our profitability.
We
may not be able to price our products at our desired margins as a result of any decrease in our bargaining power or changes in
market conditions
We
set prices for our mining machines and telecommunication products based on a number of internal and external factors, such as
the cost of production, the technological contents of our products, market conditions, and competition we face. Our ability to
set favorable prices at our desired margins and to accurately estimate costs, among other factors, has a significant impact on
our profitability. We cannot assure you that we will be able to maintain our pricing or bargaining power or that our gross profit
margin will not be driven down by market conditions or other factors. If we see higher pricing pressure due to intensified competition
from other manufacturers as our competitors’ products may be more technologically advanced or energy-efficient, decreases
in prices to our customers in the end market or any other reasons, or if we otherwise lose bargaining power due to weaker demand
for our products, we may need to reduce the prices and lower the margins of our products and we may even be unable to continue
to market our products at all. Moreover, we may not be able to accurately estimate our costs or pass on all or part of any increase
in our costs of production, in particular the costs of raw materials, components and
We
are exposed to credit risks and concentration of credit risks in relation to defaults from counterparties
There
are credit risks associated with our business. In particular, a drop in the Bitcoin price may also result in lower economic returns
for mining activities of our blockchain customers and adversely affect their businesses and financial conditions, which may further
affect their credit profiles and their ability to settle our accounts receivables. Although we generally require our blockchain
customers to make full payment for our mining machines before delivery of products, in 2018 we began offering credit sales to
customers in China. As of December 31, 2018, 2019 and 2020, our net accounts receivable was US$21.6 million, US$8.1 million
and US$7.2 million, respectively, and we recorded allowance for doubtful accounts of US$1.8 million, US$1.8 million and US$4.8
million as of the same dates.
In addition, we also face concentration of credit risks associated
with our business. Our exposure to credit risk is influenced mainly by the individual characteristics of each customer as well as the
industry or country in which the customers operate and is concentrated on a few customers. As of December 31, 2018, 2019 and 2020, 33%,
15% and 24% of our total accounts receivables were due from one of our customers, respectively, and approximately 71%, 42% and 53% of
our accounts receivables were attributable to three of our customers, respectively.
Although
we monitor our exposure to credit risk on an ongoing basis and make periodic judgment on impairment of overdue receivables based
on the likelihood of collectability, we cannot assure you that all of our counterparties are creditworthy and reputable and will
not default on payments in the future. If we encounter significant delays or defaults in payment by our customers or are otherwise
unable to recover our accounts receivables, our cash flow, liquidity and financial condition may be materially and adversely affected.
The
businesses that we are pursuing through certain of our subsidiaries’ initiatives are novel and subject to technical, operational,
financial, regulatory, legal, reputational and marketing risks
We
have and may continue to acquire interests in various businesses, including financial technology companies, broker-dealers, and
digital currency transfer and payment businesses. We have limited experience with the operation of such businesses. In some countries
the licensing requirements and regulations expressly cover companies engaged in digital currency activities; in others it is not
clear whether or how the existing laws and regulations apply to digital currency activities. Licenses and registrations that we
may be required to obtain may subject us to various anti-money laundering, know-your-customer, record-keeping, reporting and capital
and bonding requirements, limitations on the investment of customer funds, and inspection by regulatory agencies. These are areas
in which we do not have substantial experience and which are subject to the risks of new and novel businesses, including technical,
operational, financial, regulatory, legal and reputational risks, as well as the risk that we may be unable to market, license
or sell our technology successfully or profitably. The occurrence of any such risks, any such penalties, or even allegations of
criminal or civil misconduct, could have a material adverse effect on us and on our financial results and business.
Our
prepayments to suppliers may subject us to counterparty risk associated with such suppliers and negatively affect our liquidity
We
are required to prepay some of our suppliers before the service is provided to secure the supplier’s production capacity.
The amount of our prepayments may significantly increase as we continue to pursue technological advancement. We are subject to
counterparty risk exposure to our suppliers. Any failure by our suppliers to perform their contract obligations on a timely manner
and/or with our requested quality may result in us not being able to fulfill customers’ orders accordingly. In such event,
we may not be able to regain the prepayment in a timely manner or in full, even though our suppliers are obligated to return such
prepayments under specified circumstances as previously agreed upon. Furthermore, if the cash outflows for the prepayments significantly
exceed the cash inflows during any period, our future liquidity position will be adversely affected.
If
we fail to maintain appropriate inventory levels in line with the approximate level of demand for our products, we could lose
sales or face excessive inventory risks and holding costs
To
operate our business successfully and meet our customers’ demands and expectations, we must maintain a certain level of
finished goods inventory to ensure immediate delivery when required. We are also required to maintain an appropriate level of
raw materials for our production. However, forecasts are inherently uncertain. If our forecasted demand is lower than what eventually
transpires, we may not be able to maintain an adequate inventory level of our finished goods or produce our products in a timely
manner, and we may lose sales and market share to our competitors. On the other hand, we may also be exposed to increased inventory
risks due to accumulated excess inventory of our products or raw materials, parts and components for our products. Excess inventory
levels may lead to increases in inventory holding costs, risks of inventory obsolescence and provisions for write-downs, which
will materially and adversely affect our business, financial condition and results of operations.
In
order to maintain an appropriate inventory level of finished goods and raw materials to meet market demand, we adjust our procurement
amount and production schedule from time to time based on customers’ orders and anticipated demand. We also carry out an
inventory review and an aging analysis on a regular basis. We make provision for obsolete and slow-moving inventory of raw materials
and finished goods that are no longer suitable for use in production or sale. However, we cannot guarantee that these measures
will always be effective and that we will be able to maintain an appropriate inventory level. We may also be exposed to the risk
of holding excessive inventory, including older generation mining machines that are less marketable as well as older ASIC chips
which may increase our inventory holding costs and subject us to the risk of inventory obsolescence or write-offs, which could
have a material adverse effect on our business, results of operations and financial condition. For example, we recorded write-down
for the potentially obsolete, slow-moving inventory and lower of cost or market adjustment of US$61.8 million and US$6.3 million
in 2018 and 2019, respectively, primarily due to the decrease in the market price of the Bitcoin. In 2020, we also recorded write-downs
for the potentially obsolete, slow-moving inventory and lower of cost or market adjustment of US$3.6 million for the same reason.
If we cannot maintain an appropriate inventory level, we may lose sales and market share to our competitors.
Shortages
in, or rises in the prices of, the components of our mining machines may adversely affect our business
Given
the long production period to manufacture, assemble, and deliver certain components and products, problems could arise in planning
production and managing inventory levels that could seriously interrupt our operations, including the possibility of defective
parts, an increase in component costs, delays in delivery schedules, and shortages of components. In addition to ASIC chips, the
components we use for our mining machines include printed circuit boards, or PCBs, other electronic components, fans, and aluminum
casings. The production of our mining machines also requires certain ancillary equipment and components such as controllers, power
adaptors, and connectors. The production of our current products depends on obtaining adequate supplies of these components on
a timely basis and at competitive prices. We do not typically maintain large inventory of the components, and rather purchase
them on an “as-needed” basis from various third-party component manufacturers that satisfy our quality standards and
meet our production requirements. We may have to turn to less reputable suppliers if we cannot source adequate components from
our regular suppliers. Under such circumstances, the quality of the components may suffer and could cause performance issues in
our mining machines.
Shortages
of components could result in reduced production or delays in production, as well as an increase in production costs, which may
negatively affect our ability to fulfill orders or make timely shipments to blockchain customers, as well as our customer relationships
and profitability. Component shortages may also increase our costs of goods sold because we may be required to pay higher prices
for components in short supply, or redesign or reconfigure products to accommodate for the substitute components, without being
able to pass such cost to our blockchain customers. As a result, our business, results of operations and reputation could be materially
and adversely affected by any product defects.
We
may fail to anticipate or adapt to technology innovations in a timely manner, or at all
The
blockchain and telecommunications markets are experiencing rapid technological changes. Failure to anticipate technology innovations
or adapt to such innovations in a timely manner, or at all, may result in our products becoming obsolete at sudden and unpredictable
intervals and, accordingly, our products may become unmarketable. To maintain the relevancy of our products, we have actively
invested in product planning and research and development. The process of developing and marketing new products is inherently
complex and involves significant uncertainties. There are a number of risks, including the following:
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our product planning
efforts may fail in resulting in the development or commercialization of new technologies or ideas;
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our research and
development efforts may fail to translate new product plans into commercially feasible products;
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our new technologies
or new products may not be well received by consumers;
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we may not have
adequate funding and resources necessary for continual investments in product planning and research and development;
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our products may
become obsolete due to rapid advancements in technology and changes in consumer preferences; and
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our newly developed
technologies may not be protected as proprietary intellectual property rights.
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Any
failure to anticipate the next-generation technology roadmap or changes in customer preferences or to timely develop new or enhanced
products in response could result in decreased revenue and market share. In particular, we may experience difficulties with product
design, product development, marketing or certification, which could result in excessive research and development expenses and
capital expenditure, delays or prevent our introduction of new or enhanced products. Furthermore, our research and development
efforts may not yield the expected results, or may prove to be futile due to the lack of market demand.
We
require various approvals, licenses, permits and certifications to operate our business. If we fail to obtain or renew any of
these approvals, licenses, permits or certifications, it could materially and adversely affect our business and results of operations
In
accordance with the laws and regulations in the jurisdictions in which we operate, we are required to maintain various approvals,
licenses, permits and certifications in order to operate our business or engage in the business we plan to enter into. Complying
with such laws and regulations may require substantial expenses, any non-compliance may expose us to liability. In the event of
that government authorities consider us to be in non-compliance, we may have to incur significant expenses and divert substantial
management time to rectify the incidents. If we fail to obtain all the necessary approvals, licenses, permits and certifications,
we may be subject to fines or the suspension of operations of the facilities that do not have the requisite approvals, licenses,
permits or certifications, which would adversely affect our reputation, business and results of operations. See “Regulation”
for further details on the requisite approvals license permits and certifications.
We
have previously made sales to Iran, which is subject to sanctions and other regulations administered by the United States
Iran
is subject to a comprehensive sanctions program administered by the Office of Foreign Assets Control, or OFAC, and shipments of
products subject to the Export Administration Regulations promulgated by the Bureau of Industry and Security, or BIS, in the Commerce
Department are also subject to restrictions. In 2016 and 2017, we engaged in transactions that included the sale and/or delivery
of our products to Iran under circumstances that may involve breaches of U.S. sanctions and export control laws. On August 2,
2018, we disclosed these transactions to both OFAC and BIS by our submission of Voluntary Self Disclosures, or VSDs. On January
25, 2019, BIS closed the VSD with a Warning Letter and no penalty. On March 4, 2019, OFAC closed the VSD with a Cautionary Letter
and no penalty.
While
we have implemented internal control measures to mitigate our risk exposure to international sanctions, sanctions laws and regulations
are constantly evolving, and new persons and entities are regularly added to the list of Sanctioned Persons. Further, new requirements
or restrictions could come into effect which might increase the scrutiny on our business or result in one or more of our business
activities being deemed to have violated sanctions. Our business and reputation could be adversely affected if the authorities
of the United States, the European Union, the United Nations, Australia or any other jurisdictions were to determine that any
of our future activities constitutes a violation of the sanctions they impose or provides a basis for a sanctions designation
of our group.
We
had historically experienced decrease in our telecommunications business and if we are unable to continue to operate our telecommunications
business successfully, we may suspend or cease our telecommunication business entirely
Revenues from our telecommunications
business were US$3.7 million, US$3.3 million and US$1.6 million for the years ended December 31, 2018, 2019 and 2020, respectively. In
December 2020, we sold all our equity ownership in Hangzhou Yiquansheng Communication Technology Co., Ltd., which provided technology
services in the telecommunication sector and had incurred losses since its incorporation, to an affiliate controlled by Mr. Dong Hu, our
chairman of the board of directors and Chief Executive Officer. Our telecommunications business will likely continue to be driven by the
development of the communications industry in China, government policies, technological changes, user preference, and many other factors
beyond our control. There is no guarantee that we will be able to maintain the competitiveness of our products or continue to operate
our telecommunications business successfully as a key source of revenue. If we fail to grow our telecommunications business organically,
we may suspend or cease such business line entirely.
Any
disruption in our business relationship with our major telecommunications products customers as a result of market consolidation
or otherwise will adversely affect our sales and market share in the telecommunications market
The
telecommunications industry has experienced and may continue to experience significant consolidation. The merger and expansion
of participants will enable them to maximize their economies of scale to provide more competitive prices and invest a larger amount
of resources into research and development. Our telecommunication products are primarily sold to major telecommunications service
providers and institutional customers in China. Consolidation of our customers may mean that we could lose out in price and non-price
competition and lead to a significant reduction of market share. As a result, our business and results of operations in the telecommunications
market could be materially and adversely affected.
We
typically engage third-party agents to manage certain aspects of our business dealings with telecommunications products customers,
and our business relationship with them may be adversely affected by any actual or perceived misconduct of our agents, over whom
we have limited control. For example, in 2018, a local court in China convicted an employee of a major telecommunications products
customer for taking bribes from a group of business partners, including our agents, and as a result, we have been blacklisted
by such customer until the end of 2020. Although we are no longer blacklisted by such customer due to lapse of time, any future
disruption of our business relationship with major telecommunications products customers could materially and adversely affect
our business and results of operations.
The
telecommunications industry is subject to extensive and evolving laws and regulations
We
may be directly or indirectly affected by changes in government regulations relating to the telecommunications and broadcast industries
in the PRC or the U.S. Failure to comply with the relevant laws and regulations could subject us to severe penalties, which could
have a significant impact on our cash flow. Moreover, the change of laws and regulations may render our current products illegal
and require us to invest additional resources into the research and development of new products in compliance with the laws. As
a result, our business and results of operations may be adversely affected. For example, in January 2021 the New York Stock Exchange
LLC, or NYSE announced to delist three Chinese telecommunication companies based on guidance that the U.S. Department of Treasury’s
Office of Foreign Assets Control provided to the NYSE. We are uncertain whether such actions will have further impact on our business
or the Chinese telecommunication industry in general.
Our
customers are also subject to laws and regulations applicable to the telecommunications and broadcast industries in the PRC. As
they change their products to adapt to any change of telecommunications and broadcast laws, this may also require us to modify
our products to fit their new products. Such modified or newly adopted laws and regulations could, directly or indirectly, affect
the pricing, distribution and required standards of our telecommunications products and services and may have a material adverse
impact on our business.
If
we fail to maintain an effective quality control system, our business could be materially and adversely affected
We
place great emphasis on product quality and adhere to stringent quality control measures and have obtained quality control certifications
for our products. To meet our customers’ requirements and expectations for the quality and safety of our products, we have
adopted a stringent quality control system to ensure that every step of the production process is strictly monitored and managed.
Failure to maintain an effective quality control system or to obtain or renew our quality standards certifications may result
in a decrease in demand for our products or cancellation or loss of purchase orders from our customers. Moreover, our reputation
could be impaired. As a result, our business and results of operations could be materially and adversely affected.
The
quality of our products and services relies on third party suppliers and service providers we engage. If we fail to provide satisfactory
services or maintain their service levels, it could materially and adversely affect our business, reputation, financial condition
and results of operations
We
rely on third-party suppliers and service providers to provide quality products and services to customers, and our brand and reputation
may be harmed by actions taken by them that are beyond our control. Despite the measures we have taken to ensure the quality of
products and services provided by third-party suppliers and service providers, to the extent that there are manufacturing defects
beyond our control, or our third-party suppliers and service providers are unable to maintain the efficiency of their production
facilities, supply sufficient components or raw materials in a timely manner, or provide satisfactory services to our customers,
we may suffer reputational damage, and our brand image, business and results of operations may be materially and adversely affected.
Our
production facilities may be unable to maintain efficiency, encounter problems in ramping up production or otherwise have difficulty
meeting our production requirements
Our
future growth will depend upon our ability to maintain efficient operations at our existing production facilities and our ability
to expand our production capacity as needed. The average utilization rate of our SMT production lines was 85.6%, 81.7%, 40.1%
for 2018, 2019 and 2020, respectively. The utilization rate of our production facilities depends primarily on the demand for our
products and the availability and maintenance of our equipment but may also be affected by other factors, such as the availability
of employees, a stable supply of electricity, seasonal factors and changes in environmental laws and regulations. In order to
meet our customers’ demands and advancements in technology, we maintain and upgrade our equipment periodically. The pandemic
in 2020 has negatively affected our production facilities and the utilization rate of our production facilities in 2020 decreased
significantly. If the pandemic continues or we are unable to maintain our production facilities’ efficiency, we may be unable
to fulfill our purchase orders in a timely manner, or at all. This would negatively impact our reputation, business and results
of operations.
As
we continue to grow and expand our business, we expect to acquire additional production lines and possibly a new production facility
to increase our production capacity. If we are unable to acquire the necessary equipment or production facility at an acceptable
price, or at all, we may not be successful in achieving our business expansion plans.
We
have not obtained the construction works commencement permit and the real property ownership certificate for our production facility
in Wuhai, and as a result, our production activities, business, results of operations and prospects may be materially and adversely
affected if we are required to rectify this incident
To
construct a production facility, we must obtain permits, licenses, certificates and other approvals from the relevant administrative
authorities at various stages of land acquisition and construction. Obtaining such approvals may require substantial expense,
and any non-compliance may expose us to liability.
As
of the date of this annual report, we have not obtained the construction works commencement permit for the construction work carried
out in our production facility in Wuhai, and as a result, we had not obtained the real property ownership certificate for this
production facility. As advised by our PRC legal advisors, we may be required by relevant PRC government authority to rectify
this incident or may be subject to monetary penalties, which may disrupt our schedule of development and production activities
to be carried out on this production facility. We are currently in the process of rectifying this incident. Although we do not
expect any material obstacle in obtaining the real property ownership certificate for this production facility and the relevant
governmental authority permits us to carry out production activities during the period of application for real property ownership
certificate, we cannot assure you that we will be able to obtain such certificate as soon as we expected or that we will not be
required to suspend production in the future. If there is any delay in obtaining the real property ownership certificate for this
production facility, we may be required to suspend our production for a certain period of time or even vacate the relevant property,
and as a result, we may experience loss of revenue and may incur significant costs for relocation and therefore our business,
results of operations and financial condition could be materially and adversely affected.
We
rely on third-party logistics service providers to deliver our products. Disruption in logistics may prevent us from meeting customer
demand and our business, results of operations and financial condition may suffer as a result
We
engage third-party logistics service providers to deliver the ICs from our production partners to our assembly plant and our products
from our warehouses to our customers. Disputes with or termination of our contractual relationships with one or more of our logistics
service providers could result in delayed delivery of products or increased costs. There can be no assurance that we can continue
or extend relationships with our current logistics service providers on terms acceptable to us, or that we will be able to establish
relationships with new logistics service providers to ensure accurate, timely and cost-efficient delivery services. If we are
unable to maintain or develop good relationships with our preferred logistics service providers, it may inhibit our ability to
offer products in sufficient quantities, on a timely basis, or at prices acceptable to our consumers. If there is any breakdown
in our relationships with our preferred logistics service providers, we cannot assure you that no interruptions in our product
delivery would occur or that they would not materially and adversely affect our business, prospects and results of operations.
As
we do not have any direct control over these logistics service providers, we cannot guarantee their quality of service. In addition,
services provided by these logistics service providers could be interrupted by unforeseen events beyond our control, such as poor
handling provided by these logistics service providers, natural disasters, pandemics, adverse weather conditions, riots and labor
strikes. If there is any delay in delivery, damage to products or any other issue, we may lose customers and sales and our brand
image may be tarnished.
We
face intense industry competition
As
a fabless IC design company in the blockchain hardware industry, we operate in a highly competitive environment. Our competitors
include companies that may have a larger market share, greater brand recognition, broader international customer base, greater
financial resources or other competitive advantages. We anticipate that competition will increase as cryptocurrencies gain greater
acceptance and more players join the market. Furthermore, we anticipate encountering new competition as we expand our sales and
operations to new locations geographically and into wider applications of blockchain, cryptocurrency mining and mining farm operations.
We also compete in the communication network devices industry in China with respect to our telecommunications business. Some of
our competitors in this industry include larger, more well-established companies with greater economies of scale and more bargaining
power with suppliers.
Strong
competition in the market may require us to lower our prices, increase our sales and marketing expenses or otherwise invest greater
resources to maintain or gain market share as needed to adequately compete. Such efforts may negatively impact our profitability.
If we are unable to effectively adapt to changes or developments in the competitive landscape, our business, financial conditions
and results of operations may be adversely affected.
We
may encounter difficulties in recruiting and retaining key personnel
Our
future growth and success depend, to a significant extent, on the continuing service and contribution of our engineers and senior
management personnel. Many of these key personnel are highly skilled and experienced and are difficult to recruit and retain,
particularly as we seek to expand our business with respect to the mining machines. Competition for recruiting qualified personnel
is intense and recruiting personnel with the combination of skills and attributes required to execute our business strategy may
be difficult, time-consuming and expensive. As a result, the loss of any key personnel or failure to recruit, train or retain
qualified personnel could have a significant negative impact on our operations.
We
have and may increasingly become a target for public scrutiny, including complaints to regulatory agencies, negative media coverage,
and malicious allegations, all of which could severely damage our reputation and materially and adversely affect our business
and prospects
We
have been a target for public scrutiny, including complaints to regulatory agencies, negative media coverage, and malicious allegations.
For example, in October 2018, a group of individuals initiated a complaint against one of our blockchain customers, alleging that
the funds that this customer used to purchase mining machines from Zhejiang Ebang Communication Technology Co., Ltd., or Zhejiang
Ebang, one of our PRC subsidiaries, were illegal proceeds from commercial fraud committed by this customer. Although we believe
that these allegations are not true, negative publicity surrounding this incident had adversely affected our reputation. Certain
features of cryptocurrency networks, such as decentralization, independence from sovereignty and anonymity of transactions, create
the possibility of heightened attention from the public, regulators and the media. Heightened regulatory and public concerns over
us and cryptocurrency-related issues may subject us to additional legal and social responsibilities and increased scrutiny and
negative publicity over these issues, due to our leading position in the industry. From time to time, these allegations, regardless
of their veracity, may result in consumer dissatisfaction, public protests or negative publicity, which could result in government
inquiry or substantial harm to our brand, reputation and operations.
Moreover,
as our business expands and grows, both organically and through acquisitions of and investments in other businesses, domestically
and internationally, we may be exposed to heightened public scrutiny in jurisdictions where we already operate as well as in new
jurisdictions where we may operate. There is no assurance that we would not become a target for regulatory or public scrutiny
in the future or that scrutiny and public exposure would not severely damage our reputation as well as our business and prospects.
We
may face difficulties in protecting our intellectual property rights
We
rely on our intellectual property rights, in particular, our patents, software copyrights and our registered IC layout designs
of our ASIC chips. Even though we have successfully registered certain of our intellectual property rights in the PRC, it may
be possible for a third party to imitate or use our intellectual property rights without authorization. Additionally, we have
developed and utilized some intellectual property that has not been registered. If a third party misuses or misappropriates our
intellectual property, we may not be able to easily differentiate our products from the others in the market. As a result, we
may be forced into an adverse price competition that reduces our profit margin. As we develop new technologies, we will need to
continue to apply for intellectual property rights protections. There is no guarantee that we will be able to obtain valid and
enforceable intellectual property rights in the PRC or in other relevant jurisdictions as needed. Even when we are able to obtain
such protections, there is no guarantee that we will be able to effectively enforce our rights.
In
this respect, we may incur expenses and efforts to monitor and enforce our intellectual property rights. Infringement of our intellectual
property rights and the resulting diversion of resources to protect such rights through litigation or other means could also adversely
affect our profitability.
Product
defects resulting in a large-scale product recall or product liability claims against us could materially and adversely affect
our business, results of operations and reputation
We
manufacture products in accordance with internationally accepted quality standards and specifications provided by our customers.
However, we cannot assure you that all products produced by us are free of defects. Consequently, any product defects identified
by our customers or end users might erode our reputation and negatively affect our customer relationships and future business.
Product defects may also result in product returns and large-scale product recalls or product liability claims against us for
substantial damages. For example, we are currently involved in an ongoing lawsuit against us in relation to our sales of mining
machines to an individual customer who alleged that, among other things, our products did not meet advertised performance and
product quality specifications. See “Item 4. Information on the Company—B. Business Overview —Legal Proceedings.”
Such claims, irrespective of the outcomes or the merits, would likely be time-consuming and costly to defend and could divert
significant resources and management attention. Furthermore, even if we are able to defend any such claim successfully, we cannot
assure you that our customers will not lose confidence in our products or that our future relationships with our customers will
not be damaged. As a result, our business, results of operations, reputation and brand image could be materially and adversely
affected by any product defects.
Power
shortages, labor disputes and other factors may result in constraints on our production activities
Historically,
we have not experienced constraints on our production activities, including at our assembly plant, due to power shortages, labor
disputes or other factors. However, there can be no assurance that our operations will not be affected by power shortages, labor
disputes or other factors in the future, thereby causing material production disruptions and delays in our delivery schedule.
In such event, our business, results of operations and financial condition could be materially and adversely affected.
Cyber-security
incidents, including data security breaches or computer viruses, could harm our business by disrupting our delivery of services,
damaging our reputation or exposing us to liability
We
receive, process, store and transmit, often electronically, the data of our customers and others, much of which is confidential.
Unauthorized access to our computer systems or stored data could result in the theft, including cyber-theft, or improper disclosure
of confidential information, and the deletion or modification of records could cause interruptions in our operations. These cyber-security
risks increase when we transmit information from one location to another, including over the Internet or other electronic networks.
Despite the security measures we have implemented, our facilities, systems and procedures, and those of our third-party service
providers, may be vulnerable to security breaches, acts of vandalism, software viruses, misplaced or lost data, programming or
human errors or other similar events which may disrupt our delivery of services or expose the confidential information of our
customers and others. Any security breach involving the misappropriation, loss or other unauthorized disclosure or use of confidential
information of our customers or others, whether by us or a third party, could subject us to civil and criminal penalties, have
a negative impact on our reputation, or expose us to liability to our customers, third parties or government authorities. We are
not aware of such breaches to date. Any of these developments could have a material adverse effect on our business, financial
condition and results of operations.
If
we suffer failure or disruption in our information systems, our ability to effectively manage our business operations could be
adversely affected
We
use information systems to obtain, process, analyze and manage data crucial to our business such as our enterprise resource planning
system. We use these systems to, among other things, monitor the daily operations of our business, maintain operating and financial
data, manage our distribution network as well as manage our research and development activities, production operations and quality
control systems. Any system damage or failure that interrupts data input, retrieval or transmission or increases service time
could disrupt our normal operations. In particular, our operations could be disrupted if such damage or failure includes any security
breach caused by hacking or cyber-security incidents, involves efforts to gain unauthorized access to our information or systems,
or causes intentional malfunctions, loss or corruption of data, software or hardware, the intentional or inadvertent transmission
of computer viruses and similar events or third-party actions. There can be no assurance that we will be able to effectively handle
a failure of our information systems, or that we will be able to restore our operational capacity in a timely manner to avoid
disruption to our business. The occurrence of any of these events could adversely affect our ability to effectively manage our
business operations and negatively impact our reputation.
We
may be subject to liability in connection with industrial accidents at our manufacturing facilities
Due
to the nature of our operations, we are subject to the risks of potential liability associated with industrial accidents at our
production facilities. We cannot assure you that industrial accidents, whether due to malfunction of equipment or other reasons,
will not occur in the future at our production facilities. Under such circumstances, we may be subject to employee claims for
compensation or penalties imposed by relevant government authorities and may suffer damage to our reputation. In addition, we
may experience interruptions in our operations or may be required to change the manner in which we operate, as a result of governmental
investigations or the implementation of safety measures due to accidents. Any of the foregoing events could materially and adversely
affect our business, financial condition and results of operations.
We
currently do not have insurance coverage covering all risks related to our business and operations
We
do not maintain insurance policies covering all of our business risks, such as risks relating to properties, receivables, goods
in transit and public liability. There is no assurance that the insurance coverage we do have would be sufficient to cover our
potential losses. See the section headed “Item 4. Information on the Company—B. Business Overview——Insurance”
for more information on the insurance policies maintained by us. In the event there is any damage to these items, we would have
to pay for the difference ourselves where our cash flow and liquidity could be negatively affected.
If
we fail to comply with labor, work safety or environmental regulations, we could be exposed to penalties, fines, suspensions or
action in other forms
Our
operations are subject to the labor, work safety and environmental protection laws and regulations promulgated by the PRC government.
These laws and regulations require us to pay social insurance, maintain safe working conditions and adopt effective measures to
control and properly dispose of solid waste and other environmental pollutants. We could be exposed to penalties, fines, suspensions
or actions in other forms if we fail to comply with these laws and regulations. The laws and regulations in the PRC may be amended
from time to time and changes in those laws and regulations may cause us to incur additional costs in order to comply with the
more stringent rules. In the event that changes to existing laws and regulations require us to incur additional compliance costs
or require costly changes to our production process, our costs could increase and we may suffer a decline in sales for certain
products, as a result of which our business, financial conditions and results of operations could be materially and adversely
affected.
Our
business operations and international expansion are subject to geopolitical risks
Our business operation and international expansion is subject to geopolitical
risks. We mainly rely on our production partners in South Korea and Taiwan, including Samsung and TSMC, for the fabrication, testing and
packaging of our ASICs. Any significant deterioration in the cross-strait relationship may have a negative impact on the ability of our
production partners in Taiwan to fulfill their contractual obligations and ship the ASICs to us, which could have a material and adverse
effect on our business, financial condition and results of operations. Also, we are at an initial preparatory stage of executing our plan
to launch blockchain-enabled financial businesses to capture the growth opportunity along the value chain of the blockchain industry outside
of the PRC, specifically in Canada, Australia and Singapore. Any significant deterioration in the relationship between China and any of
these countries may have a material and adverse effect on our proposed business operations in these countries.
In
addition, there might be significant changes to United States trade policies, treaties and tariffs, including trade policies and
tariffs regarding the PRC. China may respond by imposing retaliatory trade measures against the United States. In 2018, the United
States was the largest country outside the PRC by sales contribution to which we sold our Bitcoin mining machines. Further,
we rely on suppliers in the United States for the supply of certain equipment and tools, such as our electronic design automation,
a development tool. If the United States restricts or prohibits the importation of ASICs or related products from China,
our international expansion may be negatively affected. If China imposes retaliatory trade measures that affect the importation
of the equipment and tools we require, we may face difficulty in our production. In both cases, our business, results of operations
and financial condition could be materially and adversely affected.
Increases
in labor costs and enforcement of stricter labor laws and regulations in the PRC and our additional payments of statutory employee
benefits may adversely affect our business and profitability
The
average wage in China has increased in recent years and is expected to continue to grow. The average wage level for our employees
has also increased in recent years. We expect that our labor costs, including wages and employee benefits, will continue to increase.
Unless we are able to pass on these increased labor costs to our customers, our profitability and results of operations may be
materially and adversely affected.
In
addition, we have been subject to stricter regulatory requirements in terms of entering into labor contracts with our employees
and paying various statutory employee benefits, including pensions, housing funds, medical insurance, work-related injury insurance,
unemployment insurance and maternity insurance to designated government agencies for the benefit of our employees. Pursuant to
the PRC Labor Contract Law and its implementation rules, employers are subject to stricter requirements in terms of signing labor
contracts, minimum wages, paying remuneration, determining the term of employee’s probation and unilaterally terminating
labor contracts. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices,
the PRC Labor Contract Law and its implementation rules may limit our ability to effect those changes in a desirable or cost-effective
manner, which could adversely affect our business and results of operations.
Pursuant
to PRC laws and regulations, companies registered and operating in China are required to apply for social insurance registration
and housing fund deposit registration within 30 days of their establishment and to pay for their employees different social insurance
including pension insurance, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance
to the extent required by law. We have not fully paid social insurance and housing provident funds for all of our employees due
to inconsistency in implementation or interpretation of the relevant PRC laws and regulations among government authorities in
the PRC and, in some cases, voluntary decisions by the relevant employees. Recently, as the PRC government enhanced its enforcement
measures relating to social insurance collection, we may be required to make up the contributions for our employees, and may be
further subjected to late fees payment and administrative fines, which may materially and adversely affect our financial condition
and results of operations. As the interpretation and implementation of labor-related laws and regulations are still evolving,
we cannot assure you that our current employment practices do not and will not violate labor-related laws and regulations in China,
which may subject us to labor disputes or government investigations. In addition, we may incur additional expenses in order to
comply with such laws and regulations, which may adversely affect our business and profitability.
The
determination of the fair value changes of our financial assets measured at fair value through profit or loss requires the use
of estimates that are based on unobservable inputs, and therefore inherently involves a certain degree of uncertainty
We
use significant unobservable inputs, such as discount rate, expected rate of return, expected volatility and risk-free interest
rate, in valuing our financial assets measured at fair value through profit or loss including bank wealth management products.
The fair value change of financial assets at fair value through profit or loss may affect our financial position and results of
operations. Accordingly, such determination requires us to make significant estimates, which may be subject to material changes,
and therefore inherently involves a certain degree of uncertainty. Factors beyond our control such as general economic condition
and changes in market interest rates may influence and cause adverse changes to the estimates we use and thereby affect the fair
value of our financial assets measured at fair value through profit or loss, which in return may adversely affect our results
of operation and financial condition.
Our
deferred tax assets are subject to accounting uncertainties
In
the application of our accounting policies, our management is required to make judgments, estimates and assumptions about the
carrying amounts of certain assets and liabilities that are not readily apparent from other sources. The estimates and associated
assumptions are based on historical experience and other factors that are considered to be relevant. Therefore, actual results
may differ from these accounting estimates. As of December 31, 2018, 2019 and 2020, the carrying value of our total deferred
tax assets was US$0.6 million, US$8.54 million and US$0, respectively. Based on our accounting policies, deferred tax assets are
recognized to the extent that it is probable that future taxable profits will be available against which the temporary differences
can be utilized. The realization of a deferred tax asset mainly depends on our management’s estimate as to whether sufficient
future profits will be available in the future. Management’s assessment is constantly reviewed and additional deferred tax
assets are recognized if it becomes probable that future taxable profits will allow the deferred tax assets to be recovered. If
sufficient future taxable profits are not expected to be generated or are less than expected, a material reversal of deferred
tax assets may arise in future periods.
Any
change or discontinuation of preferential tax treatment we currently enjoy would increase our tax charge
Our
PRC subsidiaries are subject to the PRC corporate income tax at a standard rate of 25% on their taxable income, but in 2018, 2019
and 2020, preferential tax treatment was available to three of our PRC subsidiaries. Zhejiang Ebang was recognized as a “High-tech
Enterprise” for 2018, 2019 and 2020, and Hangzhou Dewang was recognized as a “High-tech Enterprise” for 2018,
2019 and 2020, which allowed them to apply an income tax rate of 15% during respective periods. Zhejiang Ebang Information Technology
Co., Ltd., or Ebang IT, was qualified as a software enterprise in 2018, and thus was entitled to a five-year tax holiday (full
exemption for the first two years and a 50% reduction in the standard income tax rate for the following three years) in 2018 until
its software enterprise qualification ended in 2019.
We
cannot assure you that the PRC policies on preferential tax treatments will not change or that the current preferential tax treatments
we enjoy or will be entitled to enjoy will not be canceled. Moreover, we cannot assure you that our PRC subsidiaries will be able
to renew the same preferential tax treatments upon expiration. If any such change, cancelation or discontinuation of preferential
tax treatment occurs, the relevant PRC subsidiaries will be subject to the PRC enterprise income tax, or EIT, at a rate of 25%
on taxable income. As a result, the increase in our tax charge could materially and adversely affect our results of operations.
The
audit report included in this annual report is prepared by auditor who might not be fully inspected by the Public Company
Accounting Oversight Board, and, as such, you may be deprived of the benefits of such inspection
Our
independent registered public accounting firm that issues the audit report included in our annual report, as auditors of companies
that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United
States), or the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its
compliance with the laws of the United States and professional standards.
Because we have substantial operations within the PRC and the PCAOB
might be unable to conduct full inspections of the work of our independent registered public accounting firm as it relates to those operations
without the approval of the Chinese authorities, our independent registered public accounting firm might not be inspected fully by the
PCAOB. This lack of PCAOB inspections in the PRC prevents the PCAOB from regularly evaluating our independent registered public accounting
firm’s audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.
On
May 24, 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the China
Securities Regulatory Commission, or the CSRC, and the Ministry of Finance which establishes a cooperative framework between the
parties for the production and exchange of audit documents relevant to investigations in the United States and China. On inspection,
it appears that the PCAOB continues to be in discussions with the Mainland China regulators to permit inspections of audit firms
that are registered with the PCAOB in relation to the audit of Chinese companies that trade on U.S. exchanges.
On
December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators
in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. In a statement
issued on December 9, 2019, the SEC reiterated concerns over the inability of the PCAOB to conduct inspections of the audit firm
work papers with respect to U.S.-listed companies that have operations in China, and emphasized the importance of audit quality
in emerging markets, such as China. On April 21, 2020, the Chairman of the SEC, Chairman of the PCAOB and certain other SEC divisional
heads jointly issued a public statement, reminding the investors that with respect to investments in companies that are based
in or have substantial operations in many emerging markets, including China, there is substantially greater risk of incomplete
or misleading disclosures and, in the event of investor harm, substantially less recourse, in comparison to U.S. domestic companies.
The joint statement reinforced past statements of the SEC and the PCAOB on matters including the difficulty to inspect audit work
papers in China and its potential harm to investors. These public statements reflect a heightened regulatory interest in this
issue. However, it remains unclear what further actions the SEC and the PCAOB will take to address the concerns and the impact
on Chinese companies listed in the United States.
Inspections
of other firms that the PCAOB has conducted outside the PRC have identified deficiencies in those firms’ audit procedures
and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The
inability of the PCAOB to conduct full inspections of auditors in the PRC makes it more difficult to evaluate the effectiveness
of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors
outside of the PRC that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information
and procedures and the quality of our financial statements.
As
part of a continued regulatory focus in the United States on access to audit and other information currently protected by national
law, in particular China, in June 2019, a bipartisan group of lawmakers introduced bills in both houses of the U.S. Congress,
and passed requiring the SEC to maintain a list of issuers for which the PCAOB is not able to inspect or investigate an auditor
report issued by a foreign public accounting firm. The proposed Ensuring Quality Information and Transparency for Abroad-Based
Listings on our Exchanges (EQUITABLE) Act prescribes more stringent disclosure requirements for these issuers and, beginning in
2025, the delisting from U.S. national securities exchanges, such as the Nasdaq Stock Market, of issuers included on the SEC’s
list for three consecutive years. On May 20, 2020, the U.S. Senate passed the Holding Foreign Companies Accountable Act, or the
Kennedy Bill, which includes requirements similar to those in the EQUITABLE Act requiring the SEC to identify issuers whose audit
reports are prepared by auditors that the PCAOB is unable to inspect or investigate because of restrictions imposed by non-U.S.
authorities. The Kennedy Bill would also require public companies on the SEC’s list to certify that they are not owned or
controlled by a foreign government and make certain additional disclosures on foreign ownership and control of such issuers in
their SEC filings. The Kennedy Bill was approved by the U.S. House of Representatives on December 2, 2020 and was signed into
law by the U.S. President on December 18, 2020.The Kennedy Bill would amend the Sarbanes-Oxley Act of 2002 to require the SEC
to prohibit securities of any U.S.-listed companies from being listed on any of the U.S. securities exchanges, such as the Nasdaq
Stock Market, or traded “over-the-counter”, if the registrant’s financial statements have been audited by an
accounting firm branch or office that is not subject to PCAOB inspection for a period of three consecutive years after the Kennedy
Bill becomes effective. Enactment of the Kennedy Bill or any other similar legislations or efforts to increase U.S. regulatory
access to audit information could cause investor uncertainty for affected issuers, including us, and the stock price could be
materially and adversely affected. In addition, enactment of these legislations may result in prohibitions on the trading of our
Class A ordinary shares on the Nasdaq Stock Market, if our auditors fail to meet the PCAOB inspection requirement in time.
Fluctuations
in exchange rates could affect our results of operations and reduce the value of your investment
We
primarily operate in China. Our reporting currency is denominated in U.S. dollars. We are exposed to currency risks primarily
through sales and purchases which give rise to receivables, payables and cash balances that are denominated in a currency other
than the functional currency of the operations to which the transaction relates. We are therefore subject to the risk of fluctuations
in the exchange rate of U.S. dollars against Hong Kong dollars, Renminbi and Euros. The value of U.S. dollars against Hong
Kong dollars, Renminbi and Euros fluctuates and is subject to changes resulting from the PRC government’s policies and depends
to a large extent on domestic and international economic and political developments, as well as supply and demand in the local
market. With the development of the foreign exchange market and progress toward interest rate liberalization and Renminbi internationalization,
the PRC government may in the future announce further changes to the exchange rate system, and we cannot assure you that Renminbi
will not appreciate or depreciate significantly in value against Hong Kong dollars, U.S dollars or Euros in the future.
We incurred a foreign exchange loss of US$0.4 million and US$0.3 million
in 2018 and 2020, and foreign exchange gains of US5.7 million in 2019. We had currency translation losses of US$11.4 million and US$1.2
million in 2018 and 2019, respectively, and a gain of US$2.0 million in 2020, recognized in other comprehensive loss. Such currency translation
gains or losses resulted from exchange differences on translation of financial statements of our entities using currencies other than
U.S. dollars as their functional currencies, net of nil tax.
In
addition, should Renminbi appreciate against other currencies, the value of the proceeds from any future financings, which are
to be converted from U.S. dollars or other currencies into Renminbi, would be reduced and might accordingly hinder our business
development due to the reduced amount of funds raised. On the other hand, in the event of devaluation of Renminbi, the dividend
payments of our company, which are to be paid in U.S. dollars after conversion of the distributable profit denominated in Renminbi,
would be reduced. Hence, substantial fluctuation in the currency exchange rate of Renminbi may have a material adverse effect
on our business, results of operations and financial condition and the value of your investment in our Class A ordinary shares.
If
we grant employees share options or other equity incentives in the future, our net income could be adversely affected.
We
have adopted our 2020 Share Incentive Plan, effective upon the completion of our initial public offering, and may grant options
in the future. We are required to account for share-based compensation expenses in accordance with Financial Accounting Standards
Board Accounting Standards Codification Topic 718, Compensation—Stock Compensation, which generally requires a company to
recognize, as an expense, the fair value of share options and other equity incentives to employees based on the fair value of
equity awards on the date of the grant, with the compensation expense recognized over the period in which the recipient is required
to provide service in exchange for the equity award. If we grant options or other equity incentives in the future, we could incur
significant compensation charges and our results of operations could be adversely affected.
If
we fail to implement and maintain an effective system of internal controls, we may be unable to accurately or timely report our
results of operations or prevent fraud, and investor confidence and the market price of our Class A ordinary shares may be materially
and adversely affected
In the course of preparing
and auditing our consolidated financial statements for the year ended December 31, 2020, we and our independent registered public
accounting firm identified one material weakness in our internal control over financial reporting. As defined in the standards established
by the Public Company Accounting Oversight Board of the United States, a “material weakness” is a deficiency, or a combination
of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement
of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness
identified are related to the lack of sufficient accounting personnel with appropriate experience and knowledge in financial reporting
in accordance with U.S.GAAP. We intend to implement a number of measures to address these material weakness in our internal control over
financial reporting. We cannot assure you, however, that these measures may fully address these deficiencies in our internal control over
financial reporting or that we may conclude that they have been fully remedied.
Since
our initial public offering, we have become a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section
404 of the Sarbanes-Oxley Act of 2002, or Section 404, requires that we include a report of management on our internal control
over financial reporting in our annual report on Form 20-F beginning with our second annual report on Form 20-F after becoming
a public company. In addition, once we cease to be an “emerging growth company” as such term is defined in the JOBS
Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control
over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover,
even if our management concludes that our internal control over financial reporting is effective, our independent registered public
accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with
our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the
relevant requirements differently from us. In addition, as a public company, our reporting obligations may place a significant
strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely
complete our evaluation testing and any required remediation. During the course of documenting and testing our internal control
procedures, in order to satisfy the requirements of Section 404, we may identify other weaknesses and deficiencies in our internal
control over financial reporting.
In
addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified,
supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal
control over financial reporting in accordance with Section 404. Generally, if we fail to achieve and maintain an effective internal
control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations,
which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access
to capital markets, harm our results of operations, and lead to a decline in the trading price of our Class A ordinary shares.
Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate
assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or
criminal sanctions. We may also be required to restate our financial statements from prior periods.
Risks
Relating to Conducting Business in China
We
may be adversely affected by inflation or labor shortage in China
In
recent years, the PRC economy has experienced periods of rapid expansion and highly fluctuating rates of inflation. According
to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for December 2018,
2019 and 2020 were increases of 1.9%, 4.5% and 0.2%, respectively. Although we have not been materially affected by inflation
in the past, we may be affected if PRC experiences higher rates of inflation in the future. It is uncertain when the general price
level may increase or decrease sharply in the future. Moreover, the significant economic growth in China has resulted in a general
increase in labor costs and shortage of low-cost labor. Inflation may cause our production cost to continue to increase. If we
are unable to pass on the increase in production cost to our customers, we may suffer a decrease in profitability and a loss of
customers and our results of operations could be materially and adversely affected.
We
may be subject to EIT on our worldwide income if our company or any of our subsidiaries were considered a PRC “resident
enterprise” under the PRC Enterprise Income Tax Law, or the EIT Law
Under
the EIT Law and its implementation rules, enterprises established outside of the PRC with “de facto management bodies”
within the PRC are considered a “resident enterprise” and will be subject to EIT at a rate of 25% on their worldwide
income. The implementation rules under EIT define the term “de facto management bodies” as “establishments that
carry out substantial and overall management and control over the production, operation, personnel, accounting, properties, etc.
of an enterprise.” The State Administration of Taxation of the PRC, or the SAT promulgated the Notice Regarding the Determination
of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies,
or Circular 82, on April 22, 2009, which provides certain specific criteria for determining whether the “de facto management
body” of a Chinese-controlled offshore incorporated enterprise is located in the PRC. On July 27, 2011, the SAT issued
the Measures for Administration of Income Tax of Chinese Controlled Resident Enterprises Incorporated Overseas (Trial), or Circular
45, to supplement Circular 82 and other tax laws and regulations. Circular 45 clarifies certain issues relating to resident status
determination. Although Circular 82 and Circular 45 apply only to offshore enterprises controlled by PRC enterprises or PRC group
companies and not those controlled by PRC individuals or foreigners, the determining criteria set forth in Circular 82 and Circular
45 may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining
the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or individuals or
foreign enterprises. A substantial majority of our senior management team is located in China. If our company or any of our subsidiaries
were considered to be a PRC “resident enterprise,” we would be subject to EIT at a rate of 25% on our worldwide income.
Dividends
payable to our foreign investors and gains on the sale of our Class A ordinary shares by our foreign investors may become subject
to PRC tax
Under
the EIT Law and its implementation regulations issued by the State Council, a 10% PRC withholding tax is applicable to dividends
payable to investors that are non-resident enterprises, which do not have an establishment or place of business in the PRC or
which have such establishment or place of business but the dividends are not effectively connected with such establishment or
place of business, to the extent such dividends are derived from sources within the PRC. Similarly, any gain realized on the transfer
of our Class A ordinary shares by such investors is also subject to PRC tax at a current rate of 10%, subject to any reduction
or exemption set forth in applicable tax treaties or under applicable tax arrangements between jurisdictions, if such gain is
regarded as income derived from sources within the PRC. If we are deemed a PRC resident enterprise, dividends paid on our Class
A ordinary shares, and any gain realized from the transfer of our Class A ordinary shares, would be treated as income derived
from sources within the PRC and would as a result be subject to PRC taxation. Furthermore, if we are deemed a PRC resident enterprise,
dividends payable to individual investors who are non-PRC residents and any gain realized on the transfer of our Class A ordinary
shares by such investors may be subject to PRC tax at a current rate of 20%, subject to any reduction or exemption set forth in
applicable tax treaties or under applicable tax arrangements between jurisdictions. If we or any of our subsidiaries established
outside China are considered a PRC resident enterprise, it is unclear whether holders of our Class A ordinary shares would be
able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas. If dividends
payable to our non-PRC investors, or gains from the transfer of our Class A ordinary shares by such investors, are deemed as income
derived from sources within the PRC and thus are subject to PRC tax, the value of your investment in our Class A ordinary shares
may decline significantly.
PRC
regulations relating to investments in offshore companies by PRC residents may subject our PRC-resident beneficial owners or our
PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries or limit our PRC subsidiaries’
ability to increase their registered capital or distribute profits
In
July 2014, the State Administration of Foreign Exchange of the PRC, or SAFE, promulgated the Circular on Relevant Issues Concerning
Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special
Purpose Vehicles, or SAFE Circular 37, which replaces the previous SAFE Circular 75. SAFE Circular 37 requires PRC residents,
including PRC individuals and PRC corporate entities, to register with SAFE or its local branches in connection with their direct
or indirect offshore investment activities. SAFE Circular 37 is applicable to our shareholders who are PRC residents and may be
applicable to any offshore acquisitions that we may make in the future.
Under
SAFE Circular 37, PRC residents who make, or have prior to the implementation of SAFE Circular 37 made, direct or indirect investments
in offshore special purpose vehicles, or SPVs, are required to register such investments with SAFE or its local branches. In addition,
any PRC resident who is a direct or indirect shareholder of an SPV, is required to update its registration with the local branch
of SAFE with respect to that SPV, to reflect any material change. Moreover, any subsidiary of such SPV in China is required to
urge the PRC resident shareholders to update their registration with the local branch of SAFE to reflect any material change.
If any PRC resident shareholder of such SPV fails to make the required registration or to update the registration, the subsidiary
of such SPV in China may be prohibited from distributing its profits or the proceeds from any capital reduction, share transfer
or liquidation to the SPV, and the SPV may also be prohibited from making additional capital contributions into its subsidiaries
in China. In February 2015, SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy
on Direct Investment, or SAFE Notice 13. Under SAFE Notice 13, applications for foreign exchange registration of inbound foreign
direct investments and outbound direct investments, including those required under SAFE Circular 37, must be filed with qualified
banks instead of SAFE. Qualified banks should examine the applications and accept registrations under the supervision of SAFE.
We have used our best efforts to notify PRC residents or entities who directly or indirectly hold shares in our Cayman Islands
holding company and who are known to us as being PRC residents to complete the foreign exchange registrations. However, we may
not be informed of the identities of all the PRC residents or entities holding direct or indirect interest in our company, nor
can we compel our beneficial owners to comply with SAFE registration requirements. We cannot assure you that all other shareholders
or beneficial owners of ours who are PRC residents or entities have complied with, and will in the future make, obtain or update
any applicable registrations or approvals required by, SAFE regulations. Failure by such shareholders or beneficial owners to
comply with SAFE regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiaries, could subject
us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiaries’
ability to make distributions or pay dividends to us or affect our ownership structure, which could adversely affect our business
and prospects.
Furthermore,
as these foreign exchange and outbound investment related regulations are relatively new and their interpretation and implementation
has been constantly evolving, it is unclear how these regulations, and any future regulation concerning offshore or cross-border
investments and transactions, will be interpreted, amended and implemented by the relevant government authorities. For example,
we may be subject to a more stringent review and approval process with respect to our foreign exchange activities, such as remittance
of dividends and foreign-currency-denominated borrowings, which may adversely affect our financial condition and results of operations.
We cannot assure you that we have complied or will be able to comply with all applicable foreign exchange and outbound investment
related regulations. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of
such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations
required by the foreign exchange regulations. This may restrict our ability to implement our acquisition strategy and could adversely
affect our business and prospects.
We
and our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises or
other assets attributed to a Chinese establishment of a non-Chinese company, or immovable properties located in China owned by
non-Chinese companies
In
February 2015, SAT issued a Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by
Non-Tax Resident Enterprises, or SAT Public Notice 7. SAT Public Notice 7 extends its tax jurisdiction to transactions involving
transfer of other taxable assets through offshore transfer of a foreign intermediate holding company. In addition, SAT Public
Notice 7 provides clear criteria for assessment of reasonable commercial purposes and has introduced safe harbors for internal
group restructurings and the purchase and sale of equity through a public securities market. SAT Public Notice 7 also brings challenges
to both foreign transferor and transferee (or other person who is obligated to pay for the transfer) of taxable assets. In October
2017, SAT issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Non-resident
Enterprise Income Tax at Source, or SAT Bulletin 37, which came into effect on December 1, 2017. The SAT Bulletin 37 further
clarifies the practice and procedure of the withholding of non-resident EIT. Where a non-resident enterprise transfers taxable
assets indirectly by disposing of the equity interests of an overseas holding company, which is an indirect transfer, the non-resident
enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such Indirect
Transfer to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard
the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose
of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect transfer other than transfer of shares
acquired and sold on public markets may be subject to EIT, and the transferee or other person who is obligated to pay for the
transfer is obligated to withhold the applicable taxes, currently at a rate of 10%. Both the transferor and the transferee may
be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.
We
face uncertainties as to the reporting and other implications of certain past and future transactions that involve PRC taxable
assets, such as offshore restructuring, sale of the shares in our offshore subsidiaries and investments. Our company may be subject
to filing obligations or taxed if our company is transferor in such transactions and may be subject to withholding obligations
if our company is transferee in such transactions, under SAT Public Notice 7 or SAT Bulletin 37, or both.
We
are subject to PRC restrictions on currency exchange
Some
of our revenues and expenses are denominated in Renminbi. The Renminbi is currently convertible under the “current account,”
which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account,”
which includes foreign direct investment and loans, including loans we may secure from our onshore subsidiaries. Currently, certain
of our PRC subsidiaries may purchase foreign currency for settlement of “current account transactions,” including
payment of dividends to us, without the approval of the SAFE by complying with certain procedural requirements. However, the relevant
PRC governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account
transactions. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from,
or registration with, the SAFE and other relevant PRC governmental authorities. Since a part of our future net income and cash
flow will be denominated in Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilize
cash generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign currencies to our shareholders,
including holders of our Class A ordinary shares, and may limit our ability to obtain foreign currency through debt or equity
financing for our subsidiaries.
If
the custodians or authorized users of our controlling non-tangible assets, including chops and seals, fail to fulfill their responsibilities,
or misappropriate or misuse these assets, our business and operations may be materially and adversely affected
Under
PRC law, legal documents for corporate transactions, including agreements and contracts such as the leases and sales contracts
that our business relies on, are executed using the chop or seal of the signing entity or with the signature of a legal representative
whose designation is registered and filed with the relevant local branch of the market supervision administration.
In
order to maintain the physical security of our chops and the chops of our PRC entities, we generally store these items in secured
locations accessible only by the authorized personnel of each of our PRC subsidiary and consolidated entities. Although we monitor
such authorized personnel, there is no assurance such procedures will prevent all instances of abuse or negligence. Accordingly,
if any of our authorized personnel misuse or misappropriate our corporate chops or seals, we could encounter difficulties in maintaining
control over the relevant entities and experience significant disruption to our operations. If a designated legal representative
obtains control of the chops in an effort to obtain control over any of our PRC subsidiary or consolidated entities, we, our PRC
subsidiaries or consolidated entities would need to pass a new shareholder or board resolution to designate a new legal representative
and we would need to take legal action to seek the return of the chops, apply for new chops with the relevant authorities, or
otherwise seek legal redress for the violation of the representative’s fiduciary duties to us, which could involve significant
time and resources and divert management attention away from our regular business. In addition, the affected entity may not be
able to recover corporate assets that are sold or transferred out of our control in the event of such a misappropriation if a
transferee relies on the apparent authority of the representative and acts in good faith.
The
M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign
investors, which could make it more difficult for us to pursue growth through acquisitions in China
The
Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory
agencies in August 2006 and amended in June 2009, and some other regulations and rules concerning mergers and acquisitions established
additional procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming
and complex, including requirements in some instances that shall obtained an approval from the Ministry of Commerce, or the MOFCOM,
in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. Moreover,
the Anti-Monopoly Law requires that the MOFCOM shall be notified in advance of any concentration of undertaking if certain thresholds
are triggered. In addition, the Safety Review System for Merger and Acquisition of Domestic Companies by Foreign Investors issued
by the MOFCOM that became effective in September 2011 specify that mergers and acquisitions by foreign investors that raise “national
defense and security” concerns and mergers and acquisitions through which foreign investors may acquire de facto control
over domestic enterprises that raise “national security” concerns are subject to strict review by the MOFCOM, and
the rules prohibit any activities attempting to bypass a security review, including by structuring the transaction through a proxy
or contractual control arrangement. In the future, we may grow our business by acquiring complementary businesses. Complying with
the requirements of the above-mentioned regulations and other relevant rules to complete such transactions could be time consuming,
and any required approval processes, including obtaining approval from the MOFCOM or its local counterparts may delay or inhibit
our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
We
face regulatory uncertainties in China that could restrict our ability to grant share incentive awards to our employees or consultants
who are PRC citizens.
Pursuant
to the Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in a Stock Incentive
Plan of an Overseas Publicly-Listed Company issued by SAFE on February 15, 2012, or Circular 7, a qualified PRC agent (which could
be the PRC subsidiary of the overseas-listed company) is required to file, on behalf of “domestic individuals” (both
PRC residents and non-PRC residents who reside in China for a continuous period of not less than one year, excluding the foreign
diplomatic personnel and representatives of international organizations) who are granted shares or share options by the overseas-listed
company according to its share incentive plan, an application with SAFE to conduct SAFE registration with respect to such share
incentive plan, and obtain approval for an annual allowance with respect to the purchase of foreign exchange in connection with
the share purchase or share option exercise. Such PRC individuals’ foreign exchange income received from the sale of shares
and dividends distributed by the overseas listed company and any other income shall be fully remitted into a collective foreign
currency account in China, which is opened and managed by the PRC domestic agent before distribution to such individuals. In addition,
such domestic individuals must also retain an overseas entrusted institution to handle matters in connection with their exercise
of share options and their purchase and sale of shares. The PRC domestic agent also needs to update registration with SAFE within
three months after the overseas-listed company materially changes its share incentive plan or make any new share incentive plans.
We
have adopted our 2020 Share Incentive Plan, effective upon the completion of our initial public offering, and may grant options
in the future. When we do, from time to time, we need to apply for or update our registration with SAFE or its local branches
on behalf of our employees or consultants who receive options or other equity-based incentive grants under our share incentive
plan or material changes in our share incentive plan. However, we may not always be able to make applications or update our registration
on behalf of our employees or consultants who hold any type of share incentive awards in compliance with Circular 7, nor can we
ensure you that such applications or update of registration will be successful. If we or the participants of our share incentive
plan who are PRC citizens fail to comply with Circular 7, we and/or such participants of our share incentive plan may be subject
to fines and legal sanctions, there may be additional restrictions on the ability of such participants to exercise their share
options or remit proceeds gained from sale of their shares into China, and we may be prevented from further granting share incentive
awards under our share incentive plan to our employees or consultants who are PRC citizens.
Risks
Relating to Our Securities
Because
we do not expect to pay dividends in the foreseeable future, you must rely on price appreciation of our Class A ordinary shares
for return on your investment
We
currently intend to retain most, if not all, of our available funds and any future earnings to fund the development and growth
of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not
rely on an investment in the Class A ordinary shares as a source for any future dividend income.
Our
board of directors has complete discretion as to whether to distribute dividends. Even if our board of directors decides to declare
and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results
of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our
subsidiary, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly,
the return on your investment in our Class A ordinary shares will likely depend entirely upon any future price appreciation of
the Class A ordinary shares. There is no guarantee that the Class A ordinary shares will appreciate in value or even maintain
the price at which you purchased the Class A ordinary shares. You may not realize a return on your investment in our Class A ordinary
shares and you may even lose your entire investment in our Class A ordinary shares.
There
can be no assurance that we will not be classified as a passive foreign investment company, or PFIC, for U.S. federal income tax
purposes for any taxable year, which could result in adverse U.S. federal income tax consequences to U.S. Holders of our Class
A ordinary shares and related warrants
A
non-U.S. corporation, such as our company, will be classified as a “passive foreign investment company,” or PFIC,
for U.S. federal income tax purposes for any taxable year if either (1) at least 75% of its gross income for such year consists
of certain types of “passive” income or the “income test”; or (2) at least 50% of the value of its
assets (generally based on an average of the quarterly values of the assets) during such year is attributable to assets that produce
passive income or are held for the production of passive income, or the “asset test.” Based on the current and expected
composition of our income and assets and value of our assets and projections as to the value of our Class A ordinary shares, we
do not presently expect to be a PFIC for the current taxable year. However, no assurance can be given in this regard because the
determination of whether we are or will become a PFIC for any taxable year is a fact-intensive inquiry made on an annual basis
that depends, in part, upon the composition of our income and assets, which may change over time if we expand and diversify our
product offerings. Fluctuations in the market price of our Class A ordinary shares may cause us to be or become a PFIC for the
current or subsequent taxable years because the value of our assets for the purpose of the asset test may be determined by reference
to the market price of our Class A ordinary shares (which has been and may continue to be volatile). The composition of our income
and assets may also be affected by how, and how quickly, we use our liquid assets and the cash.
If
we were to be or become a PFIC for any taxable year during which a U.S. Holder (as defined in “Item 10. Additional Information—E.
Taxation—Material U.S. Federal Income Tax Considerations”) holds our Class A ordinary shares or warrants, certain
adverse U.S. federal income tax consequences could apply to such U.S. Holder. See “Item 10. Additional Information—E.
Taxation—Material U.S. Federal Income Tax Considerations—Passive Foreign Investment Company Rules.”
Our
amended and restated memorandum and articles of association contain anti-takeover provisions that could have a material adverse
effect on the rights of holders of our Class A ordinary shares
Our
amended and restated memorandum and articles of association contain provisions to limit the ability of others to acquire control
of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our
shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from
seeking to obtain control of our company in a tender offer or similar transaction. Our board of directors has the authority, without
further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences,
privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including
dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be
greater than the rights associated with our ordinary shares. Preferred shares could be issued quickly with terms calculated to
delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides
to issue preferred shares, the price of our Class A ordinary shares may fall and the voting and other rights of the holders of
our Class A ordinary shares may be materially and adversely affected.
You
may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited,
because we are incorporated under Cayman Islands law and conduct our operations primarily in emerging markets
We
are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our amended and
restated memorandum and articles of association, the Companies Act (2021 Revision) of the Cayman Islands and the common law of
the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the
fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of
the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the
Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not
binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors
under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions
in the United States. In particular, the Cayman Islands have a less developed body of securities laws than the United States.
Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman
Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal
court of the United States.
Shareholders
of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or to
obtain copies of lists of shareholders of these companies. Our directors have discretion under our articles of association to
determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged
to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish
any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.
Certain
corporate governance practices in the Cayman Islands, which is our home country, differ significantly from requirements for companies
incorporated in other jurisdictions such as the United States. If we choose to follow home country practice in the future, our
shareholders may be afforded less protection than they otherwise would under rules and regulations applicable to U.S. domestic
issuers.
In
addition, we conduct substantially all of our business operations in emerging markets, including China, and substantially all
of our directors and senior management are based in China. The SEC, U.S. Department of Justice, or the DOJ, and other authorities
often have substantial difficulties in bringing and enforcing actions against non-U.S. companies and non-U.S. persons, including
company directors and officers, in certain emerging markets, including China. Additionally, our public shareholders may have limited
rights and few practical remedies in emerging markets where we operate, as shareholder claims that are common in the United States,
including class action securities law and fraud claims, generally are difficult or impossible to pursue as a matter of law or
practicality in many emerging markets, including China. For example, in China, there are significant legal and other obstacles
for the SEC, the DOJ and other U.S. authorities to obtaining information needed for shareholder investigations or litigation.
Although the competent authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities
of another country or region to implement cross-border supervision and administration, the regulatory cooperation with the securities
regulatory authorities in the United States has not been efficient in the absence of a mutual and practical cooperation mechanism.
According to Article 177 of the PRC Securities Law which became effective in March 2020, no foreign securities regulator is allowed
to directly conduct investigation or evidence collection activities within the territory of the PRC. Accordingly, without the
consent of the competent PRC securities regulators and relevant authorities, no organization or individual may provide the documents
and materials relating to securities business activities to foreign securities regulators.
As
a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions
taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a
company incorporated in the United States.
As
a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate
governance matters that differ significantly from the Nasdaq Stock Market listing standards; these practices may afford less protection
to shareholders than they would enjoy if we complied fully with the relevant listing standards
As
a Cayman Islands company listed on the Nasdaq Global Select Market, we are subject to the Nasdaq Stock Market listing standards.
However, the Nasdaq Stock Market listing standards permit a foreign private issuer like us to follow the corporate governance
practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ
significantly from the Nasdaq Stock Market listing standards (“Nasdaq Rules”). We currently follow home country practice
in lieu of the requirements under the Nasdaq Rules with respect to certain corporate governance standards. For example, based
on home country practice, we are not required to seek shareholder approval for issuance 20% or more of our outstanding ordinary
shares or voting power in a private offering (as defined by Nasdaq Rules). Accordingly, our shareholders not be provided with
the benefits of certain corporate governance requirements of the Nasdaq Rules.
Cayman
Islands economic substance requirements may have an effect on our business and operations.
Pursuant
to the International Tax Cooperation (Economic Substance) Act (2020 Revision) (as amended) of the Cayman Islands, or the ES Act,
that came into force on January 1, 2019, a “relevant entity” is required to satisfy the economic substance test set
out in the ES Act. A “relevant entity” includes an exempted company incorporated in the Cayman Islands as is our company.
Based on the current interpretation of the ES Act, we believe that our company, Ebang International Holdings Inc., is a pure equity
holding company since it only holds equity participation in other entities and only earns dividends and capital gains. Accordingly,
for so long as our company, Ebang International Holdings Inc., is a “pure equity holding company”, it is only subject
to the minimum substance requirements, which require us to (1) comply with all applicable filing requirements under the Companies
Act, Cap. 22 (Act 3 of 1961, as consolidated and revised) of the Cayman Islands; and (2) has adequate human resources and adequate
premises in the Cayman Islands for holding and managing equity participations in other entities. However, there can be no assurance
that we will not be subject to more requirements under the ES Act. Uncertainties over the interpretation and implementation of
the ES Act may have an adverse impact on our business and operations.
Our
dual-class voting structure will limit your ability to influence corporate matters and could discourage others from pursuing any
change of control transactions that holders of our Class A ordinary shares may view as beneficial.
We
have a dual-class share structure such that our ordinary shares consist of Class A ordinary shares and Class B ordinary shares.
Holders of Class A ordinary shares are entitled to one vote per share, while holders of Class B ordinary shares are entitled to 20 votes
per share. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, while
Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any sale, transfer, assignment
or disposition of any Class B ordinary shares by a holder thereof to any non-affiliate of such holder, each of such Class B ordinary
shares will be automatically and immediately converted into one Class A ordinary share.
Mr.
Dong Hu, our founder, chairman of the board of directors and chief executive officer, beneficially owns all of our issued Class
B ordinary shares. These Class B ordinary shares will constitute approximately 25.1 % of our total issued and outstanding
share capital and 87.0% of the aggregate voting power of our total issued and outstanding share capital. As a result of the dual-class
share structure and the concentration of ownership, Mr. Dong Hu has a considerable influence over matters such as decisions regarding
mergers and consolidations, election of directors and other significant corporate actions. He may take actions that are not in
the best interest of us or our other shareholders. This concentration of ownership may discourage, delay or prevent a change in
control of our company, which could have the effect of depriving our other shareholders of the opportunity to receive a premium
for their shares as part of a sale of our company and may reduce the price of our Class A ordinary shares. This concentrated control
will limit your ability to influence corporate matters and could discourage others from pursuing any potential merger, takeover
or other change of control transactions that holders of Class A ordinary shares may view as beneficial.
We
are a “controlled company” within the meaning of the Nasdaq Stock Market Listing Rules, and, as a result, can rely
on exemptions from certain corporate governance requirements that provide protection to shareholders of other companies.
We
are a “controlled company” as defined under the Nasdaq Stock Market Listing Rules as Mr. Dong Hu, our founder, chairman
of the board of directors and chief executive officer, owns more than 50% of our total voting power. For so long as we remain
a controlled company under that definition, we are permitted to elect to rely, and may rely, on certain exemptions from corporate
governance rules. As a result, you may not have the same protection afforded to shareholders of companies that are subject to
these corporate governance requirements.
The
dual-class structure of our ordinary shares may adversely affect the trading market for our Class A ordinary shares.
Certain
shareholder advisory firms have announced changes to their eligibility criteria for inclusion of shares of public companies on
certain indices, including the S&P 500, to exclude companies with multiple classes of shares and companies whose public
shareholders hold no more than 5% of total voting power from being added to such indices. In addition, several shareholder advisory
firms have announced their opposition to the use of multiple class structures. As a result, the dual-class structure of our ordinary
shares may prevent the inclusion of our Class A ordinary shares in such indices and may cause shareholder advisory firms
to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure.
Any such exclusion from indices could result in a less active trading market for our Class A ordinary shares. Any actions or publications
by shareholder advisory firms critical of our corporate governance practices or capital structure could also adversely affect
the value of our Class A ordinary shares.
Certain
judgments obtained against us by our shareholders may not be enforceable
We
are a Cayman Islands company and the majority of our assets are located outside of the United States. The most significant portion
of our operations is conducted in China. In addition, a majority of our current directors and officers are nationals and residents
of countries other than the United States. Substantially all of the assets of these persons may be located outside the United
States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the
United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise.
Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable
to enforce a judgment against our assets or the assets of our directors and officers.
We
are an emerging growth company within the meaning of the Securities Act and may take advantage of certain reduced reporting requirements
We
are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from
requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being
required to comply with the auditor attestation requirements of Section 404 for so long as we are an emerging growth company
until the fifth anniversary from the date of our initial listing.
The
JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards
until such date that a private company is otherwise required to comply with such new or revised accounting standards. However,
we have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards
as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS
Act is irrevocable.
We
are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions
applicable to United States domestic public companies
Because
we are a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations
in the United States that are applicable to U.S. domestic issuers, including:
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the rules under
the Exchange Act requiring the filing of quarterly reports on Form 10-Q or current reports on Form 8-K with the
SEC;
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the sections of
the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under
the Exchange Act;
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the sections of
the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for
insiders who profit from trades made in a short period of time; and
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the selective disclosure
rules by issuers of material nonpublic information under Regulation FD.
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We
have and plan to continue to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition,
we publish our results on a semi-annual basis through press releases, distributed pursuant to the rules and regulations of the
Nasdaq Global Select Market. Press releases relating to financial results and material events will also be furnished to the SEC
on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and
less timely than that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same
protections or information that would be made available to you were you investing in a U.S. domestic issuer.
Certain
data and information in this annual report were obtained from third-party sources and were not independently verified by us
This
annual report, in particular the industry data reproduced from Frost & Sullivan, contains certain data and information that
have been derived from third-party reports, either commissioned by us or publicly accessible, and other publicly available sources.
Statistical data in these sources of information also include projections based on a number of assumptions. The countries where
we operate property markets may not grow at the rate projected by such statistical data, or at all. The failure of our industry
to grow at the projected rate may have a material adverse effect on our business. In addition, the complex and changing nature
of the broad macroeconomic factors discussed in this annual report may result in significant uncertainties for any projections
or estimates relating to the growth prospects or future condition of our market. Furthermore, if any one or more of the assumptions
underlying the market data is later found to be incorrect, actual results may differ from the projections based on these assumptions.
We
have not independently verified the data and information contained in such third-party publications and reports. Data and information
contained in such third-party publications and reports may be collected using third-party methodologies, which may differ from
the data collection methods used by us. In addition, these industry publications and reports generally indicate that the information
contained therein was believed to be reliable, but do not guarantee the accuracy and completeness of such information. You should
therefore not place undue reliance on such information.
General
Risk Factors
Third
parties have claimed and may, from time to time, assert or claim that we infringed their intellectual property rights and any
failure to protect our intellectual property rights could have a material adverse impact on our business
We operate in an industry
where participants own a large number of patents and other intellectual property rights that are material to operations and will vigorously
pursue, protect and defend these rights. Our competitors or other third parties may allege to own intellectual property rights and interests
that could potentially conflict with our own. It is difficult to monitor all of the patent applications and other intellectual property
rights protection registrations or applications that may be filed in the PRC or in other relevant jurisdictions. If we offer products
that may potentially infringe on such pending applications and the applications are granted, third parties may initiate intellectual infringement
claims against us. For example, we are currently involved in an ongoing civil litigation claim against us and four other defendants in
relation to potential infringement of intellectual property rights.
As
we expand our operations with new products and into new markets, the chances of encountering infringement claims by third parties
will increase. We may incur substantial costs in defending or settling such disputes and such actions could divert significant
resources and management attention. If any such claim against us is successful, we may not have a legal right to continue to manufacture
and sell the relevant products that are found to have incorporated the disputed intellectual property. The success of such claims
may also result in an increase in our costs, including additional royalties, licensing fees or further research and development
costs to develop non-infringing alternatives, and negatively affect our profitability. Moreover, such claims, whether successful
or not, may cause significant damage to our reputation and a loss of customers, as a result of which our business and results
of operations could be materially and adversely affected.
If
we are unable to maintain or enhance our brand recognition, our business, results of operations and financial condition may be
materially and adversely affected
Maintaining
and enhancing the recognition, image and acceptance of our brand are important to our ability to differentiate our products from
and to compete effectively with our peers. Our brand image, however, could be jeopardized if we fail to maintain high product
quality, pioneer and keep pace with evolving technology trends, or timely fulfill the orders for our products. If we fail to promote
our brand or to maintain or enhance our brand recognition and awareness among our customers, or if we are subject to events or
negative allegations affecting our brand image or the publicly perceived position of our brand, our business, operating results
and financial condition could be adversely affected.
Changes
in international trade policies and international barriers to trade, or the escalation of political tensions between the United
States and China, may have an adverse effect on our business
We
exported our products to a number of countries outside of the PRC and derive sales from exporting to those countries, and we intend
to continue to sell our current and future products to countries outside of the PRC. Further, we rely on certain overseas suppliers,
including suppliers in the United States, for the supply of certain equipment and tools, such as our electronic design automation,
a development tool. Changes to trade policies, treaties and tariffs, any escalation in existing trade tensions or the advent of
a trade war, or news and rumors of the escalation of a potential trade war, in or affecting the jurisdictions in which we operate
and to which we sell our products, or the perception that these changes could occur, could adversely affect the financial and
economic conditions in those jurisdictions, as well as our international sales, financial condition and results of operations.
Political
tensions between the United States and China have escalated due to, among other things, the COVID-19 outbreak, the PRC National
People’s Congress’ passage of Hong Kong national security legislation, sanctions imposed by the U.S. Department of
Treasury on certain officials of the Hong Kong Special Administrative Region and the central government of the PRC and the executive
orders issued by former U.S. President Donald J. Trump in August 2020 that prohibit certain transactions with ByteDance Ltd.,
Tencent Holdings Ltd. and the respective subsidiaries of such companies. Rising political tensions could reduce levels of trades,
investments, technological exchanges and other economic activities between the two major economies, which would have a material
adverse effect on global economic conditions and the stability of global financial markets. Any of these factors could have a
material adverse effect on our business, prospects, financial condition and results of operations. Furthermore, there have been
recent media reports on deliberations within the U.S. government regarding potentially limiting or restricting China-based companies
from accessing U.S. capital markets. If any such deliberations were to materialize, the resulting legislation may have a material
and adverse impact on the stock performance of China-based issuers listed in the United States. It is currently unclear whether
the proposed or additional legislations would be enacted that would have the effect of potentially limiting or restricting China-based
companies from accessing U.S. capital markets.
Any
global systemic economic and financial crisis could negatively affect our business, results of operations, and financial condition
Any
prolonged slowdown in the Chinese or global economy may have a negative impact on our business, results of operations and financial
condition. For example, the global financial markets have experienced significant disruptions since 2008 and the United States,
Europe and other economies have experienced periods of recession. The recovery from the lows of 2008 and 2009 has been uneven
and there are new challenges, including the escalation of the European sovereign debt crisis from 2011 and the slowdown of the
PRC’s economic growth since 2012, which may continue. The market panics over the global outbreak of coronavirus COVID-19
and the drop in oil price have materially and negatively affected the global financial markets in March 2020, which may cause
a potential slowdown of the world’s economy. See “Item 3. Key Information—D. Risk Factors—Risks Relating
to Our Business and Industry—The recent global coronavirus COVID-19 outbreak has caused significant disruptions in our business,
which we expect will materially and adversely affect our results of operations and financial condition.” Additionally, there
is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central
banks and financial authorities of some of the world’s leading economies, including the United States and the PRC. There
have also been concerns over unrest in Ukraine, the Middle East and Africa, which have resulted in volatility in financial and
other markets. There have also been concerns over the United Kingdom leaving the European Union as well as the significant potential
changes to United States trade policies, treaties and tariffs, including trade policies and tariffs regarding the PRC. There have
also been concerns about the economic effect of the tensions in the relationship between the PRC and surrounding Asian countries.
There were and could be in the future a number of domino effects from such turmoil on our business, including significant decreases
in orders from our customers; insolvency of key suppliers resulting in product delays; inability of customers to obtain credit
to finance purchases of our products and/or customer insolvencies; and counterparty failures negatively impacting our operations.
Any systemic economic or financial crisis could cause revenues for the semiconductor industry as a whole to decline dramatically
and could materially and adversely affect our results of operations.
We
face risks of natural disasters, acts of God and occurrence of epidemics, which could severely disrupt our business operations
Natural
disasters, epidemics and other acts of God which are beyond our control may adversely affect the economy, infrastructure and livelihood
of the people in China and in other territories in which we operate and may materially and adversely affect our operations, as
our primary facilities and offices are located in China and we have other facilities and offices outside of China. Material damage
to, or the loss of, such facilities due to fire, severe weather, flood, earthquake, or other acts of God or cause may not be adequately
covered by proceeds of our insurance coverage and could materially and adversely affect our business and results of operations.
Any outbreaks of contagious disease, acts of war or terrorist attacks may cause damage or disruption to our business, our employees
and our markets, any of which could adversely impact our business and results of operations.
Changes
in China’s economic, political or social conditions or government policies could have a material adverse effect on our business,
results of operations and financial condition
Substantially
all of our revenues were and, in a foreseeable future, are expected to be derived in China, and most of our operations, including
all of our manufacturing, is conducted in China. Accordingly, our business, prospects, results of operations and financial condition
may be influenced to a significant degree by political, economic and social conditions in China generally and by continued economic
growth in China as a whole. The Chinese economy differs from the economies of most developed countries in many respects, including
the degree of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources.
Although the PRC government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction
of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, a substantial
portion of productive assets in China is still owned by the government. In addition, the Chinese government continues to play
a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant
control over China’s economic growth through strategically allocating resources, controlling the payment of foreign currency-denominated
obligations, setting monetary policy and providing preferential treatment to particular industries or companies.
While
the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and
among various sectors of the economy, and the rate of growth has been slowing since 2012. Any adverse changes in economic conditions
in China, in the policies of the Chinese government or in the laws and regulations in China could have a material adverse effect
on the overall economic growth of China. As a result, changes in economic conditions and government policies could adversely affect
our business and operating results, lead to reduction in demand for our services and adversely affect our competitive position.
Uncertainties
in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to you and us
The
PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions may be cited
for reference but have limited precedential value. Our PRC legal system is evolving rapidly, but its current slate of laws may
not be sufficient to cover all aspects of the economic activities in China, including such activities that relate to or have an
impact on our business. Implementation and interpretations of laws, regulations and rules are not always undertaken in a uniform
matter and enforcement of these laws, regulations and rules involves uncertainties.
From
time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative
and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be
more difficult to evaluate the outcome of administrative and court proceedings and the level of protection we enjoy than in more
developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of
which are not published in a timely manner or at all) that may have a retroactive effect. As a result, we may not always be aware
of any potential violation of these policies and rules until sometime after the violation. Such uncertainties, including unpredictability
towards the scope and effect of our contractual, property (including intellectual property) and procedural rights, and any failure
to respond to changes in the regulatory environment in China could materially and adversely affect our business and impede our
ability to continue our operations.
A
severe or prolonged downturn in China’s economy and political tensions between the United States and China could materially
and adversely affect our business, financial condition and results of operations
The
global macroeconomic environment is facing challenges, including a new wave of quantitative easing by the U.S. Federal Reserve
due to the COVID-19 outbreak, the economic slowdown in the Eurozone since 2014 and the uncertain impact of “Brexit.”
The growth of China’s economy has slowed down since 2012 and such slowdown may continue. The outbreak of coronavirus COVID-19
in China has resulted in a severe disruption of social and economic activities in China, which may result in a potential slowdown
of China’s economy in 2020 and beyond. See “Item 3. Key Information—D. Risk Factors—Risks Relating to
Our Business and Industry—The recent global coronavirus COVID-19 outbreak has caused significant disruptions in our business,
which we expect will materially and adversely affect our results of operations and financial condition.” In addition, there
is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central
banks and financial authorities of some of the world’s leading economies, including the United States and China. There have
also been concerns on the relationship between China and other countries, including the surrounding Asian countries and the United
States. In March 2018, the former U.S. President Donald J. Trump announced to impose tariffs on steel and aluminum entering the
United States. In June 2018, he announced further tariffs targeting goods imported from China. Subsequently, China and the U.S.
each imposed tariffs to the extent that adversely affected trade between the two countries. In October 2019, the former U.S. President
Donald J. Trump announced that China and the United States had reached a tentative agreement for the first phase of a trade deal,
under which China agreed to purchase up to US$50.0 billion of American products and services, while the United States agreed to
suspend new tariffs. Such agreement was signed in January 2020. It remains unclear what impact these tariff negotiations may have
or what further actions the two countries may take. Moreover, political tensions between the United States and China have escalated
as a result of the COVID-19 outbreak and the PRC National People’s Congress’ decision on Hong Kong national security
legislation. Rising political tensions could reduce levels of trades, investments, technological exchanges and other economic
activities between the two major economies, which would have a material adverse effect on global economic conditions and the stability
of global financial markets. Any of the circumstances would have a material adverse effect on our business, prospects, financial
condition and results of operations. See “—We plan to increase our export of mining machines to the United States
and the European Union in the future, which may be subject to high tariff rates resulting from protectionism trade policies, and
as a result, our future sales volumes, profitability and results of operations will be materially and adversely affected.”
Furthermore, there have been recent media reports on deliberations within the U.S. government regarding limiting or restricting
China-based companies from accessing U.S. capital markets. If any such deliberations were to materialize, the resulting legislation
may have a material adverse impact on the stock performance of China-based issuers listed in the United States.
The
trading price of our Class A ordinary shares may be volatile, which could result in substantial losses to investors
The
trading price of our Class A ordinary shares has been volatile since our Class A ordinary shares began to trade on the Nasdaq
Global Select Market on June 26, 2020. The trading price of our Class A ordinary shares could fluctuate widely due to factors
beyond our control. This may happen because of broad market and industry factors, like the performance and fluctuation of the
market prices of other companies with business operations located mainly in China that have listed their securities in the United
States. A number of Chinese companies have listed or are in the process of listing their securities on U.S. stock markets. The
securities of some of these companies have experienced significant volatility, including price declines in connection with their
initial public offerings. The trading performances of these Chinese companies’ securities after their offerings may affect
the attitudes of investors toward Chinese companies listed in the United States in general and consequently may impact the trading
performance of the Class A ordinary shares, regardless of our actual operating performance.
In
addition to market and industry factors, the price and trading volume for the Class A ordinary shares may be highly volatile for
factors specific to our own operations, including the following:
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variations in our
revenues, earnings and cash flow;
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changes in the operating
performance or market valuations of other cryptocurrency related companies;
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announcements of
new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors;
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announcements of
new services and expansions by us or our competitors;
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changes in financial
estimates by securities analysts;
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detrimental adverse
publicity about us, our services or our industry;
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additions or departures
of key personnel;
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fluctuations of
exchange rates between RMB and the U.S. dollar;
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release of lock-up
or other transfer restrictions on our outstanding equity securities or sales of additional equity securities;
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potential litigation
or regulatory investigations; and
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general economic
or political conditions in China or elsewhere in the world.
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Any
of these factors may result in large and sudden changes in the volume and price at which the Class A ordinary shares will trade.
Additionally,
any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure
or other matters of other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in
general, including us, regardless of whether we have engaged in any inappropriate activities. In particular, the global financial
crisis and the ensuing economic recessions in many countries have contributed and may continue to contribute to extreme volatility
in the global stock markets. These broad market and industry fluctuations may adversely affect the market price of our Class A
ordinary shares. Volatility or a lack of positive performance in our Class A ordinary shares price may also adversely affect our
ability to retain key employees, most of whom may be granted options or other equity incentives in the future.
If
securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations
regarding our Class A ordinary shares, the market price for the Class A ordinary shares and trading volume could decline
The
trading market for our Class A ordinary shares will be influenced by research or reports that industry or securities analysts
publish about our business. If one or more analysts who cover us downgrade our Class A ordinary shares, the market price for our
Class A ordinary shares would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish
reports on us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume
for our Class A ordinary shares to decline.
We
will continue to incur increased costs as a public company, which could lower our profits or make it more difficult to run a business.
As
a public company, we have incurred significant legal, accounting and other expenses that we did not incur as a private company
to ensure that we comply with the various requirements on corporate governance practices imposed by the Sarbanes-Oxley Act of
2002, as well as rules subsequently implemented by the SEC and Nasdaq Global Select Market. For example, we have increased the
number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We have
also incur additional costs associated with our public company reporting requirements. We expect that these rules and regulations
will continue to cause us to incur elevated legal and financial compliance costs, devote substantial management effort to ensure
compliance and make some corporate activities more time-consuming and costly. We are currently evaluating and monitoring developments
with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional
costs we may incur or the timing of such costs.
ITEM 4.
INFORMATION ON THE COMPANY
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History
and development of the company
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In
January 2010, Mr. Dong Hu, our founder, chairman of the board of directors and chief executive officer, founded Zhejiang Ebang
Communication Technology Co., Ltd., or Zhejiang Ebang, which established Zhejiang Ebang Information Technology Co., Ltd., or Ebang
IT, in August 2010, to conduct development and sales of communications network access devices and related equipment. In early
2014, in view of the burgeoning opportunities in the blockchain industry, we began to conduct research and feasibility studies
on the blockchain business and develop blockchain computing equipment. In August 2015, Zhejiang Ebang was listed in China on the
National Equities Exchange and Quotations Co., Ltd., or the NEEQ. In August 2016, we acquired 51.05% of the equity interest in
Hangzhou Dewang Information Technology Co., Ltd., or Hangzhou Dewang, through our capital injection in Hangzhou Dewang. In March
2018, Zhejiang Ebang was delisted from the NEEQ in preparation for the reorganization.
On May 17, 2018, we incorporated
Ebang International Holdings Inc., our holding company, as an exempted company with limited liability in the Cayman Islands. In 2018,
we underwent a series of corporate reorganizations for our initial public offering, including the incorporation of our company as the
listing vehicle, incorporation of our oversea holding companies and issuance of shares to shareholders of Ebang Hongfa to reflect their
respective shareholdings before the reorganization. We completed the reorganization in May 2018.
On June 26, 2020, our Class A
ordinary shares commenced trading on the Nasdaq Global Select Market under the symbol “EBON.” We raised approximately US$91.7
million in net proceeds after deducting underwriting commissions and the offering expenses payable by us from our initial public offering.
From
August to October 2020, to expand our blockchain-enabled financial businesses globally, we established our subsidiaries Australia
Ebon PTY LTD in Australia, EBONEX PTE.LTD.in Singapore and Ebang Communication Limited in Canada.
Corporate
Information
Our
principal executive offices are located at Building 7, No. 5, Nangonghe Road, Linping Street, Yuhang District, Hangzhou, Zhejiang,
China. Our telephone number at this address is +86 571-8817-6197. Our registered office in the Cayman Islands is located at Cricket
Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111.
Investors
should submit any inquiries to the address and telephone number of our principal executive offices. Our corporate website is http://www.ebang.com.cn.
Our agent for service of process in the United States is located at 122 East 42nd Street, 18th Floor, New York, N.Y. 10168, United
States.
We
are a leading ASIC chip design company and a leading manufacturer of high-performance Bitcoin mining machines in the global market.
We have strong ASIC chip design capability underpinned by nearly a decade of industry experience and expertise in the telecommunications
business. We believe we are one of the few fabless IC design companies with the advanced technology to independently design ASIC
chips, established access to third-party wafer foundry capacity and a proven in-house capability to produce blockchain and telecommunications
products. We have dedicated our technology and efforts to ASIC applications for Bitcoin mining machines and were a leading Bitcoin
mining machine producer in the global market.
Leveraging
our deep understanding of the cryptocurrency industry and strong blockchain technology as applied to ASIC chip design, we strive
to expand into the upstream and downstream markets of the blockchain and cryptocurrency industry value chain to diversify our
offerings and achieve a more stable financial performance. We intend to start with the cryptocurrency mining and farming business
as well as cryptocurrency trading exchange business, as described below, and explore applying blockchain technology into financial
services industries. In April 2021, we launched our self-developed proprietary cryptocurrency exchange platform Ebonex. We believe
our extensive experience in the blockchain and cryptocurrency industry positions us well in our future endeavors. We intend to
continue to concentrate our efforts in our cryptocurrency and blockchain related businesses in 2021.
In
addition, we are at an initial preparatory stage of executing our plan to launch blockchain-enabled financial businesses to capture
the growth opportunity along the value chain of the blockchain industry outside of the PRC, specifically in Canada, Australia
and Singapore. Although we have not generated any revenues from such businesses to date, we carefully selected these countries
because of what we believe to be a cryptocurrency-friendly regulatory environment, access to cryptocurrency enthusiast communities
and relatively lower application cost. We currently have no plans to establish our cryptocurrency trading exchange or online brokerage
businesses in the United States.
Overseas
Expansion
In August 2020, we established
wholly-owned subsidiaries in Singapore and Canada in preparation for establishing cryptocurrency exchanges. In October 2020, we established
a wholly-owned subsidiary in Australia to apply for an Australian financial services license with the Australian Securities & Investments
Commission (the Australian Government body that regulates the Australian financial services industry) and for registration with AUSTRAC
(the Australian Government body that regulates bitcoin exchanges). We carefully selected these countries because of what we believe to
be a cryptocurrency-friendly regulatory environment, access to cryptocurrency enthusiast communities and relatively lower application
cost. We are at an initial preparatory stage of executing our plan to launch blockchain-enabled financial business to capture the growth
opportunity along the value chain of the blockchain industry. As of the date of this annual report, we have received the Money Service
Business License from the Financial Transactions and Reports Analysis Centre of Canada, which will allow us to engage in foreign exchange
trading, digital currency transferring and dealing in virtual currencies in Canada, and we are in the process of obtaining relevant licenses
and approvals for our subsidiaries in Singapore and Australia. We expect that it will take approximately six months and 12 months (subject
to change due to COVID-19) to obtain such licenses in Australia and Singapore, respectively, subject to approvals from local authorities,
which is typical for such applications; if and once obtained, these licenses will allow us to operate cryptocurrency exchanges in these
countries in such jurisdictions. Meanwhile, we are focused on application development, regulatory compliance and talent recruitment to
ramp up execution of our new business plans for the expansion in these countries. We expect such ramp-up will support our future operations
and our compliance with local rules and regulations. Our expenses to date to implement our new business plans, including establishing
in Canada, Australia, and Singapore have not been significant, but we expect that we will require an initial investment of approximately
US$4.0 million for server rentals, application development, regulatory compliance and talent acquisition to set up cryptocurrency exchanges
in the abovementioned countries. There is no guarantee that we will receive any additional required approvals and licenses for our proposed
business in these countries in a timely manner or on commercially reasonable terms, or at all, or that we will commence the proposed business
as planned, or at all. Our current plan is to launch our operation in these countries in early 2022. However, if our expectations as to
the costs and timelines of our investment and operations at these countries or our execution of business plan prove incorrect, we may
incur additional expenses or losses. Additionally, to maintain our operational focus and based on a reassessment of our priorities, we
do not plan to pursue expansion plans in New Zealand at this time.
Any
restrictions imposed by a foreign government could force us to restructure operations, perhaps significantly, which could result
in significant costs and inefficiencies that harm our profitability, or even cause us to cease operations in the applicable jurisdiction.
Cryptocurrency is a recent technological innovation and the regulatory schemes to which cryptocurrency and the related exchange
may be subject have not been fully explored or developed by foreign jurisdictions. Thus, cryptocurrency faces an uncertain regulatory
landscape in many foreign jurisdictions. Various foreign jurisdictions may from time to time adopt laws, regulations or directives
that affect our cryptocurrency businesses. Due in part to its international nature and the nascent stage of regulation, along
with the limited experience with cryptocurrency, and language barriers between international journalists, translators and regulators,
information regarding the regulation of cryptocurrency in various jurisdictions may be incomplete, inaccurate or unreliable. As
both the regulatory landscape develops and journalistic familiarity with cryptocurrency increases, mainstream media’s understanding
of cryptocurrency and the regulation thereof may improve. As we enter into the markets in Canada, Australia, and Singapore, we
expect to continue to monitor the local regulations regarding cryptocurrency and financial service platforms and retain local
regulatory counsels. See “Item 3. Key Information—D. Risk Factors—The current regulatory environment in
foreign markets, and any adverse changes in that environment, could have a material adverse impact on our blockchain products
business and our planned cryptocurrency exchange and financial service platform businesses,” “Item 3. Key Information—D.
Risk Factors—If we are unable to manage our growth or execute our strategies effectively, our business, results of operations
and financial condition may be materially and adversely affected” and “Item 3. Key Information—D. Risk
Factors—We may not successfully develop, market or launch any cryptocurrency exchanges or online brokerages” for details
of the associated risks.
Recent
Financings
In
November 2020, we launched a follow-on offering of 8,000,000 units (the “November 2020 Offering”), with each unit consisting
of one Class A ordinary share and one warrant to purchase one-half of one Class A ordinary share, which was subsequently completed in
January 2021 with full subscription, resulting in aggregate net proceeds of approximately US$39.2 million (excluding any exercise of
the warrants included in such units). All of such warrants were subsequently exercised in connection with the Warrant Inducement Offering
(described below).
In
February 2021, we launched and completed a second offering for an aggregate of 19,200,000 units (the “February 2021 Offering”),
with each unit consisting of one Class A ordinary share and one warrant to purchase one-half of one Class A ordinary share, resulting
in aggregate net proceeds of approximately US$90 million (excluding any exercise of the warrants included in such units). All of such
warrants were subsequently exercised in connection with the Warrant Inducement Offering.
In
February 2021, we also entered into inducement agreements with certain investors (the “Holders”) to induce them to exercise
the warrants issued to them in connection with the November 2020 Offering and the February 2021 Offering for all 13,600,000 Class A ordinary
shares available for exercise thereunder (the “Warrant Inducement Offering”). The Holders exercised these warrants, in full,
and were issued 13,600,000 Class A ordinary shares as a result of such exercises, with the Company receiving aggregate net proceeds of
approximately US$68 million after deducting sales commissions payable to the warrant solicitation agents and related expenses of approximately
US$4.4 million. Additionally, as consideration for their exercise of such warrants, we issued to the Holders the new warrants, which
are exercisable, anytime within five (5) years from the date on which they became exercisable, at an exercise price of US$11.06 per share,
for an aggregate of up to the 13,600,000 Class A ordinary shares.
In
April 2021, we launched and completed a third offering for an aggregate of 14,000,000 units, with each unit consisting of one Class A
ordinary share and one warrant to purchase one-half of one Class A ordinary share, resulting in aggregate net proceeds of approximately
US$80 million (excluding any exercise of the warrants included in such units).
Our
Value Proposition
We
are a fabless IC designer engaged in the front-end and back-end of IC design, which are the major components of the IC product development
chain. We currently dedicate our technology and expertise in IC design for our blockchain products business and telecommunication products
business.
The
following diagram illustrates the general process of IC design and production for our blockchain and telecommunications products businesses:
We
independently design and develop our blockchain and telecommunications products in-house, including the design of proprietary ASIC chips
for our cryptocurrency mining machines. Front-end IC design and back-end IC design are the key parts of the IC design process. We determine
the parameters of the IC chip, establish the basic logic of the design, map out the initial plan for the physical layout, and conduct
back-end verification on the design. Our strong design capability has ensured that we have achieved a 100% tape-out success
rate to date. We then closely partner with industry-leading third-party suppliers to fabricate, test and package the IC products we design. Leveraging
our long-established experience and know-how in producing telecommunications products, we have also established in-house production capabilities
to conduct PCB assembly and system assembly for both mining machines and a wide range of telecommunications products. We believe our
outstanding technical expertise and production experience in IC development chain enables us to continuously introduce ICs of higher
performance and power efficiency for application in both the blockchain and telecommunications fields.
Our
Blockchain Products Business
Our blockchain products business
is primarily comprised of Bitcoin mining machine sales and mining machine hosting services.
Bitcoin Mining Machine Products
Our technology and expertise in
ASIC applications is primarily dedicated to our blockchain products business, which consists predominantly of the design, development,
production and sales of our proprietary ASIC-based Bitcoin mining machines under the Ebit brand. Our Ebit Bitcoin mining machines feature
our proprietary ASICs, and the ASICs are integrated with components procured by us.
Since the beginning of our ASIC
designing business, we have successfully and independently completed design of 14nm, 12nm, 10nm, 8nm, 7nm and 6nm ASICs. Our existing
ASIC chips are targeted at solving Bitcoin’s cryptographic algorithms incorporating the latest technology. Since the launch our
first mining machine with 10nm ASIC chips in 2017, we have introduced mining machines with second generation 10nm ASIC chips in 2019 and
mining machines with 8nm ASIC chips in 2020; we plan to introduce mining machines to the market with second generation 8nm ASIC chips
and 6nm ASIC chips in 2021. We have also completed the design phase of a chip for simultaneous Litecoin and Dogecoin mining and we expect
a rollout of such chips in 2021. We currently focus on developing our proprietary 5nm ASIC chips and mining machines for non-Bitcoin cryptocurrencies
such as Ethereum and Filecoin. We will continue to devote significant resources to new innovations applying blockchain technology.
We
have also designed our hardware architecture to optimize the computing power of our ASIC chips while efficiently consuming energy. This
includes incorporating heat dissipation technology, such as high-grade aluminum cases and customized heat sinks and fans. All of our
mining machine products incorporate built-in controllers so they can operate as standalone devices. Our products utilize automatic cluster
management software system for intelligent tracking and monitoring of the operation status of the device, which provides convenience
for large-scale set-ups with multiple devices. Our products are also configured to allow for simplified software and internet connection
setup, thereby reducing installation and configuration time.
We
continuously introduce new series of Bitcoin mining machines incorporating the latest development of ASIC design and process technology.
We also produce and sell Bitcoin mining machine accessories and offer ancillary service to our customers to assist their operations.
Existing
Mining Machine Products
The
table below describes the key mining machine products that we have sold:
Product
|
|
Release
Date
|
|
Type
of ASICs
|
|
Hash
Rate
|
|
Ebit E9+
|
|
December 2016
|
|
14 nm
|
|
9 TH/s
|
|
|
|
|
|
|
|
|
|
Ebit E10
|
|
December 2017
|
|
10 nm
|
|
18 TH/s
|
|
|
|
|
|
|
|
|
|
Ebit E9.1
|
|
May 2018
|
|
10 nm
|
|
14 TH/s
|
|
|
|
|
|
|
|
|
|
Ebit E9.2
|
|
April 2018
|
|
10 nm
|
|
12 TH/s
|
|
|
|
|
|
|
|
|
|
Ebit E9.3
|
|
May 2018
|
|
10 nm
|
|
16 TH/s
|
|
|
|
|
|
|
|
|
|
Ebit E9.5
|
|
June 2019
|
|
10 nm
|
|
11.5 TH/s
|
|
|
|
|
|
|
|
|
|
Ebit E9i
|
|
July 2018
|
|
10 nm
|
|
13.5 TH/s
|
|
|
|
|
|
|
|
|
|
Ebit E9i+
|
|
September 2018
|
|
10 nm
|
|
13.5 TH/s
|
|
Product
|
|
Release
Date
|
|
Type
of ASICs
|
|
Hash
Rate
|
|
Ebit E10.1
|
|
April 2019
|
|
10 nm
|
|
18 TH/s
|
|
|
|
|
|
|
|
|
|
Ebit E10.2
|
|
May 2019
|
|
10 nm
|
|
27 TH/s
|
|
|
|
|
|
|
|
|
|
Ebit E10.3
|
|
June 2019
|
|
10 nm
|
|
24 TH/s
|
|
|
|
|
|
|
|
|
|
Ebit E10.5
|
|
June 2019
|
|
10 nm
|
|
18 TH/s
|
|
|
|
|
|
|
|
|
|
Ebit E12
|
|
May 2019
|
|
10 nm
|
|
44 TH/s
|
|
|
|
|
|
|
|
|
|
Ebit E15
|
|
November 2020
|
|
8 nm
|
|
60 TH/s
|
|
During
2020, we sold 11,230 Bitcoin mining machines.
Mining
Machine Products Under Development
Our
current mining machine products are designed for Bitcoin mining. We are in the process of developing ASIC chips for a new generation
of mining machines for Bitcoin mining, as well as mining machines for other cryptocurrencies. The table below shows products we have
currently in development.
Project
|
|
Description
|
|
Current
Status
|
Bitcoin mining machines
|
|
|
|
|
|
8 nm ASIC chip mining machine*
|
|
ASIC chip with higher hash
rate than 10 nm ASIC chip
|
|
Design completed in 2019
|
|
|
|
|
|
7 nm ASIC chip mining machine*
|
|
ASIC chip with higher hash
rate than 10 nm ASIC chip and 8 nm ASIC chip
|
|
Design completed in 2019
|
|
|
|
|
|
6 nm ASIC chip mining machine*
|
|
ASIC chip with better performance
and efficiency than 7 nm ASIC chip
|
|
Design completed in 2021
|
|
|
|
|
|
5 nm ASIC chip mining machine
|
|
ASIC chip with better performance
and efficiency than 7 nm ASIC chip
|
|
Under design
|
|
|
|
|
|
Other
cryptocurrency mining machines
|
|
Mining machines for Litecoin/SimpleChain
and DASH*
|
|
Each designed specifically
for Litecoin/SimpleChain or DASH mining
|
|
Design completed in 2018
|
|
|
|
|
|
Mining machines for Monero,
Zerocash, Siacoin/Decred and Bytom*
|
|
Each designed specifically
for Monero, Zerocash, Siacoin/Decred or Bytom mining
|
|
Design completed in 2019
|
|
|
|
|
|
Mining
machines for simultaneous Litecoin and Dogecoin mining*
|
|
Designed specifically for
simultaneous Litecoin and Dogecoin mining
|
|
Design completed in 2021
|
|
|
|
|
|
Mining machines for Eth
and Filecoin
|
|
Each designed specifically
for Eth or Filecoin mining
|
|
Under design
|
*
|
We will further determine
the timeline for launching these products based on market demands and conditions.
|
Mining
Machine Hosting Services
We
began our mining machine hosting services in 2017 to diversify our offerings. Our mining machine hosting services enable customers to
operate their mining machines remotely in a cost-effective manner. We help customers set up and configurate their mining machines and
monitor the daily operation of these mining machines on our hosting site where the utility cost is relatively low. We also provide routine
maintenance services to our customers. We currently provide our mining machine hosting services only to those who have purchased mining
machines from us.
We typically enter into separate
service agreements with buyers of our mining machines for the hosting services. We charge customers a hosting services fee, which is negotiated
case by case and usually in proportion to the utility consumption of each customer’s mining machines that we host. The revenues
from our mining machine hosting services was US$9.1 million in 2020. The average service fee per kWh was generally US$0.04 per kWh throughout
2020.
Our
Telecommunications Business
We
entered the telecommunications business in 2010. Our communications network devices mainly focus on the access layer, which is the entry
point for providing access to the telecommunications network for end users. Our products are broadly grouped under the following product
lines, as well as related parts and accessories:
|
●
|
Fiber-Optic Communication
Access Devices. Our fiber-optic communication access devices are mainly used by telecommunications service providers in access
network server rooms. Our fiber-optic communication access devices are also designed to provide enterprises with a differentiated
smart terminal solution for communication access with a view to fulfilling client needs in terms of cost and user experience. The
main products we offer under our fiber-optic communication access devices product line include multiprotocol label switching (MPLS)
fiber-optic access network devices, multi-service access platform (MSAP) integrated business access devices and wavelength-division
multiplexing (WDM) fiber-optic devices.
|
|
●
|
Enterprise Convergent
Terminals. Our enterprise convergent terminal products are designed to provide complete informatization service for enterprises,
from smart terminal to smart pipeline and cloud computing. The main products we offer under our enterprise convergent terminal product
line include gigabit passive optical network (GPON), enterprise cloud gateway devices, Industrial Internet of Things (IoT) access
devices and business enterprise smart wireless access devices.
|
Our
Customers
Blockchain
Products Business
Our customer base for sales of
our Ebit mining machines is comprised of both enterprises and individual buyers. We generally do not enter into long term agreements with
our mining machine customers. Sales are typically made on one-off sales contract or purchase order bases. Generally, we either require
prepayment in full or offer alternate payment plans for customers to prepay a certain percentage with the remainder to be settled after
delivery of the products. Substantially all of the customers of our mining machine hosting services are customers who have purchased our
mining machines.
In
2020, a significant portion of our mining machine customers were located in China. All of our mining machines are distributed through
direct sales. Nevertheless, we do not restrict resales of our mining machine products by our customers, so some of our customers in China
may resell purchased products to end users or other buyers located in overseas markets. Our revenues generated from sales to customers
in China represent 99.8% of our total revenues in 2020. Our revenues from sales to customers outside of China/sales of mining machines
delivered to overseas end users, such as customers/users in North America, Central Asia and the Southeast Asia, represent 0.2% in 2020.
Telecommunications
Business
Our telecommunications products
are mainly sold in China under the brand name “EBANG” through direct sales. Our customer base for our telecommunications products
primarily includes major telecommunications service providers in China.
We do not have any long-term or
exclusive agreement with our telecommunications product customers. Sales to our enterprises customers are generally made on one-off sales
contract or purchase order bases with a credit period of one to nine months. We generally enter into framework agreement with the major
telecommunications service providers in China with a credit period up to one year. We typically require payments to be made in installments
upon delivery of the products. We encourage our sales representatives to negotiate shorter credit periods to reduce our credit risk.
Research
and Development
We place strong emphasis on research
and development. We consider research and development capability as a crucial factor to our success and our ability to develop innovative
and competitive products to meet the technological requirements of customers. As of December 31, 2020, our research and development team
was comprised of 79 employees, or approximately 38.5% of our total number of employees, based across our offices in China. Our research
and development expenses were US$8.5 million in 2020.
Our
research and development team is overseen by our Chairman and CEO, Mr. Dong Hu. Within our research and development team, we have a specialized
ASIC chip design team focused on designing ASIC chips for the development of cutting-edge mining machine products and for other blockchain
research and development projects that utilize ASIC chips. The other members of our research and development team focus on non-ASIC aspects
of mining machine products, telecommunications products and new applications for blockchain technology. As part of our business strategy
to expand into other markets, in addition to developing more advanced mining machines for cryptocurrency mining, we are currently undertaking
several new research and development projects in blockchain technology, such as blockchain solutions for medical recordkeeping and financial
services management. Our research and development team tracks, evaluates and anticipates the latest industry developments and customers’
needs in determining our research and development project focus and new product roadmap. We will continue to enhance our research and
development capabilities in blockchain technology.
Production
Our
Fabless Model
We
do not directly manufacture ICs used for our products. Instead, we utilize what is known as a fabless model, whereby we conduct front-end
and back-end designs of our IC chips, which are then manufactured, packaged and tested by world-class wafer foundry and OSAT partners
we cooperate with. Under the fabless model, we are able to leverage the expertise of industry leaders that are certified by the ISO in
such areas as fabrication, assembly, quality control and assurance, reliability and testing. In addition, the fabless model allows us
to avoid many of the significant costs and risks associated with owning and operating various fabrication and packaging and testing facilities.
Our fabrication partner is responsible for procurement of the majority of the raw materials used in the production of our ICs. As a result,
we can focus our resources on research and development, product design and additional quality assurances.
Wafer
Fabrication
We primarily work with an IC fabrication
partner to ascertain their production resource that can be allocated to us before we place an order according to our business need. After
we place our orders, and once they accept our orders, we are required to prepay in full in order to secure production capacity. The wafers
are delivered in an average of approximately three to four months from the time we place our order.
We
principally purchased wafers for our ASIC chips from Samsung, and also began to work with TSMC in 2017 on the development of a new ASIC
chip and established a relationship and are in discussions with two other major wafer foundries in order to diversify our supplier sources
and to gain access to additional capacity for future ASIC chips. We will seek to procure wafers from either or both of these two wafer
foundries in the event that our current suppliers are unable to accept or fulfil our purchase orders or otherwise continue supply us
wafers. While we continue to seek opportunities to improve our supply chain, we face concentration risks, as we currently depend on two
suppliers for our wafers. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business and Industry—we
rely on a limited number of third parties to fabricate our ASIC chips, which are the core technology used in our mining machines.”
Packaging
and Testing
After
the wafers are manufactured, they are shipped to an OSAT company for packaging into IC chips, which are then tested to ensure the required
quality assurance procedures are all met. Properly tested IC chips are then delivered to our production facilities for mounting and assembly.
We
procure IC packaging and testing services from leading OSAT companies, including STATS ChipPAC. In 2018, in order to keep up with our
increasing production demand, we began working with PTI. STATS ChipPAC is controlled by Jiangsu Changjiang Electronics Technology Co.,
Ltd. and its various subsidiaries, or JCET, which along with PTI are among the largest OSAT companies in the world.
Assembly
Plant
We
have in-house capabilities to produce our blockchain and telecommunications products at our production facilities. These include PCB
assembly to create the mounted circuit boards once the IC chips have been manufactured, and general assembly to integrate the circuit
boards with other components and parts for assembling the final products.
We
procure certain raw materials, components and parts, such as electronic components, metal cases, cables, antennae and packaging materials,
which are used by us for the assembly of PCBs and our final products. We typically maintain three or four different suppliers for most
of our raw materials, components and parts. We generally place purchase orders with our suppliers based on our estimated purchase orders
and production schedule. The lead time for procurement is generally one to four months. We are typically required to pay our suppliers
before or upon delivery of the raw materials, components and parts. We closely monitor the quality of all raw materials provided by our
suppliers to ensure that all raw materials comply with the stringent requirements of our customers. For more information, see “Item
4. Information on the Company—B. Business Overview—Quality Control.”
We
outsource some of our production to third-party subcontractors in order to meet additional capacity needs. We currently maintain a working
relationship with approximately four to five third-party subcontractors for PCB and general system assembly. The terms of our subcontracting
arrangement are set out in individual written work orders, and the amount of work outsourced is determined on an as-needed basis. To
maintain our product standards, we institute strict quality control measures with our third-party subcontractors. These measures include
requiring product testing at various stages of production and utilizing our proprietary software to record and report the quality testing
results.
Production
Facilities
We
operate two production facilities in Hangzhou, Zhejiang and Wuhai, Inner Mongolia with a gross floor area of 7,344 and 14,200.26 square
meters, respectively. Our production facility is capable of assembling mining machines and telecommunications products. The Hangzhou
production facility houses three SMT production lines and two general assembly lines, and Wuhai production facility houses one SMT production
line and one general assembly line, respectively, as of December 31, 2020.
SMT
production lines are responsible for PCB assembly, which is a key process for both our mining machine and telecommunications products.
The maximum output volume of our in-house production facilities is largely dictated by the production capacity of our SMT production
lines in Hangzhou. As of December 31, 2020, we owned four SMT production lines with an aggregate of up to 1171 SMT production hours
per month. The average utilization rate of our SMT production lines was 85.6%, 81.7%, 40.1% for 2018, 2019 and 2020, respectively.
We
outsource some of our SMT production activities to third-party subcontractors in order to meet additional capacity needs. For the years
ended December 31, 2018 and 2019 and 2020, our outsourced productive SMT production volume amounted to approximately 75.0%, 69.2%, 8.4%
of our total in-house and outsourced productive SMT production volume, respectively.
We
plan to expand our production capacity by constructing a new production facility in Yuhang District, Hangzhou and installing two additional
new SMT production lines in place of the two older SMT production lines. We commenced the construction of our new production facility
toward the end of 2019 and expect to commence its operation by the end of 2021.
Quality
Control
We
place great emphasis on the importance of quality control in every aspect of our business. We produce our products in accordance with
our strict quality control system and quality standards. We obtained all the material quality control certifications in the PRC for our
products or production facilities. From sourcing of raw materials, production, delivery and installation, each stage of the production
process is subject to our quality control procedures for both in-house production and outsourced third-party production.
We
have implemented various quality-control checks into our production process and the IC fabrication process by our production partners.
In addition, we provide timely and effective after-sales services and support to our users. We have quality control personnel based at
each of our production facilities. They are part of our production department and are led by our quality control supervisor. The quality
control team is primarily responsible for monitoring the quality of procurement raw materials, production process and finished products
and supervising the product testing. We have our own on-site quality control staff to inspect each stage of the production process. The
quality control staff inspects semi-finished products at various stages of the production process to ensure their compliance with our
internal quality control standards and measures. This helps us detect defects during the production process and take steps to rectify
those defects, where appropriate. For outsourced production, we require that all third-party contractors utilize a software system we
provide to track, test and record each product made for us using unique identifying barcodes on the products so that we can review the
testing results of their products. Our third-party contractors also agree to allow us to conduct sample testing of their products and
random spot checks of their facilities. We require final testing on the products before their delivery to our customers to ensure the
products meet the specifications and requirements of its customers.
After-Sales
Services and Warranties
We
provide installation services of communication network devices to our customers depending upon the products purchased and the type of
customer. Our mining machines are configured by the end-users using our instruction manual.
For our mining machines, we provide
a six-month warranty for the overall machine and a one-year warranty for the power supplies. During the warranty period, we provide maintenance
and after-sale services, which include technical support, equipment repair and maintenance. In connection with warranty service, the customer
will courier the hardware to us, and we will ship the machine back to the customer once repairs are completed. Our service hotline is
available seven days a week between 8:30 a.m. to 10:30 p.m. and we offer on-site maintenance services as needed.
For our telecommunications products,
we typically provide a 12 to 36-month warranty depending on the type of customer and product. During the warranty period, we provide maintenance
and after-sale services, which include technical support, system and network resting, equipment repair and maintenance. Our service hotline
is available seven days a week between 8:30 a.m. to 11:00 p.m. and we offer on-site maintenance services as needed.
Sales
and Marketing
Historically,
the marketing of our blockchain products was done through word of mouth, press releases of our product launches and exhibitions when
we launch a new product. Certain of our available products are also advertised on our website which is updated periodically. From time
to time, we maintain a presence on social media in order to raise awareness of our brand. We have not relied heavily on sales force for
advertising and marketing of our blockchain products, as most of our customers approach us proactively.
For
our telecommunications products, we obtain supplier contracts through bidding processes held by the major telecommunications service
providers in China, in order to become an approved supplier. We set up sales offices in the provinces with large distribution scale according
to the winning bids. Our sales offices also serve the surrounding provinces to form an effective sales network.
Competition
We
compete primarily with the other major mining machine producers and potentially with any new players which may overcome the high barriers
of entry, in particular in technology and access to wafer foundry capacity. We seek to compete in technology and service quality with
our competitors.
Our
competitors also include many well-known domestic and international players in blockchain and cryptocurrency industry. We expect that
competition in the Bitcoin mining industry will continue to be intense as we compete not only with existing players that have been focused
on Bitcoin mining, but also new entrants that include well-established players in the semiconductor industry, and players who were not
predisposed to this industry in the past. We also expect that we may face competition from existing and new cryptocurrency farming and
cryptocurrency trading related service providers as well as non-cryptocurrency blockchain application providers. In the IC industry,
we expect to face competition from existing and new players that are more established than us. Some of these competitors may also have
stronger brand names, greater access to capital, longer histories, longer relationships with their suppliers or customers and more resources
than we do.
Intellectual
Property
We
rely on a combination of copyright, trademark, patent and proprietary technology and contractual restrictions on disclosure to protect
our intellectual property rights. We enter into relevant confidentiality agreements or provisions with our employees and certain customers
and suppliers and rely on such confidentiality agreements or provisions and other protection of our technical know-how to maintain our
technical advantages in our products and design.
As of the date of this annual
report, we had registered 51 patents, seven IC layout designs and 56 software copyrights, with an additional 23 patent applications and
three software copyright applications in the PRC. Our key intellectual property achievements include multiple generations of ASIC chips,
including our proprietary 10 nm ASIC chip, which was used by us for introducing to market the first commercially available mining machine
that incorporates 10 nm ASIC chips among major mining machine producers.
On
November 27, 2020, we obtained an exclusive license of a key patent in the Bitcoin mining industry, which license granted us with the
exclusive right to use the patent in Korea and export the product from Korea to other countries. The core of this patent is AsicBoost,
a method that can increase performance of Bitcoin mining by about 20%. The performance gain is achieved through a high-level optimization
of the Bitcoin mining algorithm which allows for drastic reduction in gate count on the mining chip.
Despite
our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our technology. Monitoring
unauthorized use of our technology is difficult and costly, and we cannot be certain that the steps we have taken will prevent misappropriation
of our technology. From time to time, we may have to resort to litigation to enforce our intellectual property rights, which could result
in substantial costs and diversion of our resources.
Through
the use of licensing arrangements, we utilize various technologies, software and other intellectual property that were developed by third
parties. During the course of product design and manufacturing, we incorporate certain third-party technologies or implement technical
or commercial standards, practices or intellectual property which require licenses from wafer foundries. These licenses allow us to use
or access the wafer foundries’ technologies and intellectual property rights in connection with the making of photomask for our
ASIC chips. We have also purchased licenses for various design software from third parties to conduct our IC chip design. These license
grants were usually perpetual and irrevocable on a project-by-project basis. Third parties may initiate litigation against us alleging
infringement of their proprietary rights or breach of a licensing agreement or declaring their non-infringement of our intellectual property
rights. If third parties prevail on such claims, and if we fail to develop non-infringing technology or license the infringed or similar
technology or cure the breach on a timely basis, our business could be harmed. Moreover, even if we are able to license the infringed
or similar technology, license fees could be substantial and may adversely affect our results of operations.
See
“Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business and Industry—We may face difficulties
in protecting our intellectual property rights” and “Item 3. Key Information—D. Risk Factors—Risks Relating to
Our Business and Industry—Third parties have claimed and may, from time to time, assert or claim that we infringed their intellectual
property rights and any failure to protect our intellectual property rights could have a material adverse impact on our business.”
Insurance
Besides
the government-mandated social insurance and housing provident fund schemes and motor vehicle insurance, we do not maintain any insurance
covering our properties, equipment, inventory or employees, and we do not carry any business interruption or product liability insurance
or any third-party liability insurance to cover claims in respect of personal injuries or any damages arising from accidents on our properties
or in relation to our operations. We believe that our insurance coverage is adequate and is in line with industry practice.
Environmental
Matters
We
have received GB/T24001-2016/ISO 14001:2015 environmental management system certification, which is valid until September 11, 2021 and
subject to renewal. Due to the nature of our business, our operational activities do not directly generate industrial pollutants, and
we did not incur significant cost for compliance with applicable environmental protection laws and regulations in 2018, 2019 and 2020.
Legal
Proceedings
We
may from time to time be subject to various legal, arbitration or administrative proceedings arising in the ordinary course of business,
such as proceedings in respect of disputes with suppliers or customers and labor disputes. As of the date of this annual report, we are
party to the following legal, arbitration or administrative proceedings, regulatory inquiries or investigations made or pending that
we believe are material to our business and results:
On
January 29, 2019, we filed a civil action in the Hangzhou Intermediate People’s Court against one of our customers. The defendant
had purchased from us, and we had delivered, 90,000 mining machines for a total price of RMB453.6 million (approximately US$65.1 million)
pursuant to an executed sales contract. The defendant has paid RMB380 million (approximately US$54.5 million), and we were seeking the
payment of the balance of RMB73.6 million (approximately US$10.6 million) plus interest and legal expenses. On August 15, 2019, the defendant
filed a counterclaim against us, primarily alleging incompletion of delivery of products and seeking return of the payment of the alleged
undelivered products plus interest and legal expenses. On October 15, 2020, the Zhejiang High People’s Court ruled that this case
shall be tried in the Hangzhou Intermediate People’s Court. As of the date of this annual report, the case is still under review
by the court.
On March 18, 2019, we filed
a civil action in the Baoshan Intermediate People’s Court against one of our customers. The defendant had purchased from us, and
we had delivered, 10,000 mining machines for a total price of RMB50.4 million (approximately US$7.2 million). The defendant has paid RMB20
million (approximately US$2.9 million), and we were seeking the payment of the outstanding balance of RMB30.4 million (approximately US$4.4
million). On September 23, 2019, the defendant filed a counterclaim against us, primarily alleging failure to deliver products and seeking
return of the payment of the alleged undelivered products plus interest and legal expenses. On December 29, 2020, the court dismissed
the counterclaim and rendered a judgement in our favor where it held that the defendant should pay the outstanding balance of RMB30.4
million (approximately US$4.4 million) within 30 days of the date of such judgement. On January 12, 2021, we received a notice from the
Baoshan Intermediate People’s Court that the defendant had appealed such judgement to Yunnan High People’s Court. As
of the date of this annual report, the case is still pending before the high court.
On
November 22, 2019, we brought a claim in the Hangzhou Intermediate People’s Court against one of our customers and the ultimate
beneficial owner of the mining machines in connection with our sales of 80,000 mining machines for an amount of RMB 403.2 million
(approximately US$57.9 million) pursuant to a sales contract and a supplementary contract, alleging that the defendants only paid RMB12.5
million (approximately US$1.8 million) of the total balance and seeking full payment of the outstanding RMB282.2 million (approximately
US$40.5 million) balance plus interest and hold both defendants jointly and severally liable. We subsequently withdrew such claim in
order to amend the pleading and add one more defendant. On December 8, 2020, the Hangzhou Intermediate People’s Court approved
such withdrawal. On December 24, 2020, we filed a new claim in the Hangzhou Intermediate People’s Court based on the same
cause of action. As of the date of this annual report, the case is still under review by the court.
On
November 19, 2019, we filed a civil action in the High Court of the Hong Kong Special Administrative Region, Court of First Instance
against a then-major supplier, alleging breach of contract for delivering defective products and seeking damages in the sum of US$25.1
million plus interest and costs. As of the date of this annual report, the case is still under review by the court.
REGULATION
Regulatory
Overview of the PRC
We
are engaged in the research and development, production and sales of blockchain and telecommunications products in the PRC. The following
sets forth a summary, which do not purport to be complete, of the relevant PRC regulatory authorities and PRC laws, regulations and government
policies that are applicable to our business operations in the PRC.
Competent
Regulatory Authorities
The
Ministry of Industry and Information Technology of the PRC, or the MIIT, and its departments are in charge of the industrial and information
technology sectors at the national level. The MIIT formulates and directs the implementation of industrial sector planning, industrial
policies and standards; monitors the daily operations of industrial sector; promotes the development and independent innovation of major
technical equipment; manages the communications industry, guiding and advancing the construction of information technology infrastructures;
and coordinates the safeguarding of national information technology security, while in charging of the approval of network access licenses
(including trial), telecommunications business operation licenses, specifications and standards for organizational implementation software
and system integration services, and radio transmission equipment type approval certificates. The local Commissions of Economy and Information
Technology are the competent authorities in charge of the industrial and information technology sectors at the local level.
The
General Administration of Quality Supervision, Inspection and Quarantine of the PRC is in charge of mandatory product certification activities,
and the Certification and Accreditation Administration of the PRC, or the CNCA, is in charge of the organization, implementation, supervision,
management and overall coordination of mandatory product certification activities at the national level. The local Quality and Technology
Supervision Bureaus and various Entry and Exit Inspection and Quarantine Offices are responsible for the supervision, management and
enforcement of mandatory product certification activities in their relevant local areas.
The
National Copyright Administration of the PRC is in charge of the management of software copyright registration. The Copyright Protection
Center of China and its local software registration offices are responsible for software registration.
The
MOFCOM and its local bureaus are responsible for supervising and managing the establishment of overseas companies for foreign investment.
The
NDRC and its local bureaus are responsible for providing macro guidance, comprehensive services and overall supervision over outbound
investments.
The
General Administration of Customs of the PRC, or the PRC Customs, and its local bureaus are responsible for the supervision of import
and export trade, registration of customs declaration enterprises, approvals of bonded premises, and other relevant matters.
SAFE
and its local bureaus are responsible for the supervision and management of foreign exchange receipts and payments or foreign exchange
operational activities carried out by PRC institutions and individuals, and foreign exchange receipts and payments or foreign exchange
operational activities carried out in the PRC by foreign institutions and individuals.
The
State Administration of Work Safety and its local bureaus are responsible for the supervision and management of work safety activities.
The
Ministry of Ecology and Environment of the PRC and its local bureaus are responsible for the management of environmental protection activities,
while the local bureaus also supervise and manage the protection of resources, prevention of pollution and other matters on environmental
protection in the local areas.
The
China Semiconductor Industry Association is a national industrial and non-profit social organization, consisting of entities, experts
and other related enterprises and institutions engaged in the manufacturing, design, scientific research, development, operation, application
and education of integrated circuits, semiconductor discrete devices, semiconductor materials and equipment.
Regulations
and Government Policies Relating to the IC and Blockchain Industries
Pursuant
to the Circular on Prevention of Risks Associated with Bitcoin, or the Circular, jointly promulgated by the PBOC, the MIIT, the China
Banking Regulatory Commission, the CSRC and the China Insurance Regulatory Commission on December 3, 2013, Bitcoin shall be considered
a kind of virtual commodity in nature, which does not have the same legal status with fiat currencies and shall not be used and circulated
in the market as currency. This circular also provides that financial institutions and payment institutions shall not engage in businesses
related to Bitcoin.
Pursuant
to the Announcement on Prevention of Risks from Offering and Financing of Cryptocurrencies promulgated by seven PRC governmental authorities
including the PBOC on September 4, 2017, illegal activities in offering and financing of cryptocurrencies, including initial coin offerings
(ICOs), are forbidden in the PRC because such activities may be considered to constitute illegal offering of securities or illegal fundraising.
This announcement further provides that financial institutions and payment institutions shall not engage in businesses related to cryptocurrency
offering or financing transactions.
There
is no prohibition under PRC laws and regulations currently in effect on the possession of Bitcoin by PRC citizens and organizations.
Purchase
and running of computing hardware by PRC citizens or organizations for the purpose of Bitcoin mining in China do not violate any PRC
laws and regulations currently in effect. PRC citizens and organizations are not prohibited from engaging in Bitcoin mining activities
in China. Design, production, sale (including both wholesale and retail) of computing hardware used for Bitcoin mining, including BPUs,
in China, or sale (including both wholesale and retail) or export of such computing hardware from China, do not violate any provisions
of any PRC laws and regulations currently in effect, provided that such activities shall comply with the general regulatory rules in
relation to the administration of industry and commerce registration, taxation, fire control and environmental protection and the relevant
policies and requirements imposed by any PRC governmental authorities.
As
demonstrated by the Circular of the State Council on Printing and Distributing Policies for Encouraging the Development of the Software
and IC Industries issued on June 24, 2000, the PRC continues to enact policies encouraging new and advanced technology and supporting
the software and IC industries.
On
January 28, 2011, the State Council issued the Circular of the State Council on Printing and Distributing Policies for Further Encouraging
the Development of the Software Industry and the Integrated Circuit Industry, or the Circular, which aims to formulate a series of policies
for the purposes of further optimizing development environment for the software industry and integrated circuit industry, increasing
the quality and the level of industry development and cultivating a number of influential and strong leading enterprises in these industries.
The Circular addresses topics including fiscal tax policies, investment and financing policies, research and development policies, import
and export policies, talent policies, intellectual property policies and market policies.
On
June 24, 2014, the State Council issued the Outline for Promoting the Development of the National Integrated Circuit Industry,
which highlights that great efforts shall be put on the development of the IC design industry. By focusing on the industrial chain of
key areas and strengthening IC design, software development, system integration, collaborative innovation in contents and services, the
goal is to drive the development of the manufacturing industry through the rapid growth of the design industry.
On
June 8, 2015, the NDRC issued the Notice on Implementing Major Engineering Packages in Emerging Industries. The Notice highlights the
efforts in developing IC construction infrastructures, focusing on enhancing the level of advanced technology, design industry concentration
ratio and industrial chain supporting ability, selecting areas with more mature technology, good industrial base and wide application
potential, and accelerating the industrialization of high performance IC products.
On
May 4, 2016, the Ministry of Finance of the PRC, the SAT, NDRC and the MIIT, jointly released the Notice on Enterprise Income Tax Preferential
Policies for Software and IC Enterprises. This Notice specifically stipulates the preferential policies on EIT related to IC manufacturing
enterprises, IC design enterprises, software enterprises, key software enterprises within the national planning layout and IC design
enterprises.
On
December 15, 2016, the State Council issued the Notice of the 13th Five-Year Plan for National Informatization. This notice highlights
the need to strengthen the layout of strategic innovative technologies, including blockchain technology, as well as others such as enhanced
quantum communications, future networks, brain-like computing, artificial intelligence, holographic display, virtual display, big data
cognitive analysis, new nonvolatile storage, driverless vehicles and gene editing.
On
July 8, 2017, the State Council issued the Notice on Issuing New Generation AI Development Plan. This notice points out that advancing
the integration of blockchain technology and artificial intelligence and establishing a new social credit system will significantly minimize
the cost and risk of interpersonal communications.
In
August 2017, the State Council issued the Guidance on Further Expanding and Upgrading Information Consumption Potential for Sustained
Release of Domestic Demand, which highlights and encourages the use of open source code to develop personalized software and the launch
of trial applications using new technologies such as blockchain and artificial intelligence.
In
October 2017, the General Office of the State Council issued the Guiding Opinions on Actively Promoting Supply Chain Innovation and Application,
which highlights and promotes the research of using emerging technologies such as blockchain and artificial intelligence to establish
a credit evaluation mechanism based on supply chain.
In
November 2017, the State Council issued the Guiding Opinions on Deepening Internet + Advanced Manufacturing Industry to Develop Industrial
Internet which promotes the research and exploration of applications of emerging technologies in industrial Internet, such as edge computing,
artificial intelligence, augmented reality, virtual reality, and blockchain technology.
Laws
and Regulations Relating to Industry Qualifications
Pursuant
to the Telecommunications Regulations of the PRC issued on September 25, 2000 and last amended on February 6, 2016 and the Administrative
Measures for the Network Access of Telecommunications Equipment issued on May 10, 2001 and last amended on September 23, 2014, the State
implements a network access system that covers telecommunications terminal equipment, wireless communications equipment and network interconnection
equipment connected to public telecommunications networks. A network access license issued by the MIIT shall be obtained for telecommunications
equipment implementing network access. Without a network access license, such equipment is not allowed to be connected to a public telecommunications
network for use nor to be sold domestically.
Pursuant
to the Regulations on Administration of Mandatory Product Certification issued on July 3, 2009 and effected on September 1, 2009, producers,
sellers or importers of products included in the product catalog shall entrust a certification agency designated by the CNCA to certify
the products produced, sold or imported thereby.
Pursuant
to the Regulations of the PRC for the Administration of Radio Operation promulgated on September 11, 1993, last amended on November 11,
2016 and effected on December 1, 2016, in addition to micro-power short-range radio transmitting equipment, any other radio transmitting
equipment that is manufactured or imported for sale or use domestically shall apply to the state authority in charge of radio regulation
for approval.
Laws
and Regulations Relating to Work Safety
The
Work Safety Law of the PRC, issued on June 29, 2002, last amended on August 31, 2014 and effective December 1, 2014, provides that production
and business operation entities shall abide by this law and other laws and regulations concerning work safety, strengthen work safety
management; establish and improve work safety responsibility systems and rules; improve work safety conditions; promote work safety standardization
and improve work safety levels, so as to ensure work safety. Production and business operation entities shall have the conditions for
work safety as specified in this law and relevant laws, regulations, national standards or industrial specifications. Production and
business operation entities that do not have such conditions are not allowed to engage in production or operation activities. Breach
of the Work Safety Law of the PRC will incur various penalties, according to the specific circumstances.
Laws
and Regulations Relating to Product Quality
Pursuant
to the Product Quality Law of the PRC (2018 Version), issued and promulgated on February 22, 1993, last amended on and effective December
29, 2018, producers shall be responsible for the quality of their products. Product quality shall satisfy the following requirements:
no unreasonable danger to personal safety and the safety of property shall exist; where there are national or industry standards for
protection of health, personal safety and the safety of property, such standards shall be complied with. If the products of a producer
or seller do not comply with the national or industry standards for protection of health or personal safety or the safety of property,
orders shall be issued to cease their production or sale and products that have been illegally produced or sold shall be confiscated.
A fine shall be imposed equal to an amount greater than the value of the products that have been illegally produced or sold (hereafter
including products already sold and goods not yet sold) but less than three times the value of the products; where there is illegal income,
the illegal income shall be confiscated; where the circumstances are serious, the business license shall be revoked; where the case constitutes
a crime, criminal liability shall be pursued in accordance with law. If a producer or a seller is found to mix impurities or imitations
into products, or to pass fake goods off as genuine ones or shoddy products as good ones or sub-standard products as standard ones, such
producer or seller shall be ordered to stop production or selling; the products illegally produced or sold shall be confiscated and a
fine not less than 50% of but not more than three times the value of the products illegally produced or sold shall be imposed concurrently;
if there are illegal proceeds, such proceeds shall be confiscated concurrently; if the circumstances are serious, the business license
shall be revoked; if the case constitutes a crime, criminal liability shall be investigated in accordance with the law.
Pursuant
to the PRC Regulations on Administration of Radio Operation, issued on September 11, 1993, last amended on November 11, 2016 and effective
December 1, 2016, the manufacture or import of radio transmission devices that are required to obtain approval must meet the provisions
of the relevant laws, national standards and relevant regulations of the state authority in charge of radio regulation and comply with
the technical standards regarding approved radio transmission devices. The approval number shall be labeled on the devices. The competent
authorities for radio regulation may order anyone who violates this regulation by manufacturing or importing radio transmission devices
to be sold or used domestically without obtaining the requisite approval to rectify and may impose a fine between RMB50,000 and RMB200,000;
for those refusing to rectify, authorities may confiscate the radio transmission devices that have not obtained approval and impose a
fine between RMB200,000 and RMB1,000,000.
Pursuant
to the Regulation of Telecommunications of the PRC (2016 Version) (issued and effective on February 6, 2016), anyone who violates the
provisions of this regulation in lowering product quality or performance after obtaining the telecommunications equipment network access
license shall be subject to punishment by the product quality supervision authorities pursuant to the provisions of the relevant laws
and administrative regulations.
Laws
and Regulations Relating to Industry Standards
The
Measures on Administration of Information System Integration and Service Qualification Identification (Interim) is the industrial regulation
as recognized by the China Information Technology Industry Federation, targeting information systems integration and service qualification
identification. In particular, information system integration qualification is the objective evaluation standard for enterprises engaged
in information systems integration and service comprehensive ability and level.
The
Technical Requirements for Access Network Multi-service Access Platform, or MSAP, is a communications industrial standard on access network
multi-service access platform, stipulating MSAP system’s requirements in network location and function model. In addition, the
Safety of Information Technology Equipment (Part 1) and the Radio Disturbance Limits and Measurement Methods for Information Technology
Equipment is the national standard of information technology equipment.
The
Technical Requirements and Test Methods of Lightning Resistibility for Telecommunications Terminal Equipment is the industry standard
for telecommunications equipment.
Laws
and Regulations Relating to Other Business Areas
Trade
Pursuant
to the Foreign Trade Law of the PRC, issued on May 12, 1994, last amended on and effective November 7, 2016, foreign trade operators
engaged in import or export of goods or technologies shall file records with the foreign trade department of the State Council or its
authorized agencies, unless otherwise stipulated by the laws, administrative regulations or the foreign trade department of the State
Council. Specific measures for record filing shall be stipulated by the foreign trade department of the State Council. PRC Customs shall
not process import and export declaration and clearance formalities for foreign trade operators who have not filed records in accordance
with the provisions.
Foreign
Exchange
Pursuant
to the Regulation on Administration of Foreign Exchange of the PRC promulgated by the State Council on January 29, 1996 and last amended
on and effective August 5, 2008, other regulations issued by SAFE and other relevant government authorities, Renminbi is freely convertible
into other currencies for current account items such as trade related receipts and payments, interest payments and dividends; as for
capital account items such as direct investment, loans and portfolio investment, the prior approval of SAFE is required to convert Renminbi
into other currencies and transfer the converted currencies out of the PRC. Transactions in the PRC are subject to payment in Renminbi.
Pursuant to relevant regulations and laws, after a domestic company gets listed overseas, if any of its domestic shareholders intends
to increase or decrease overseas shares, the domestic shareholder shall handle overseas shareholding registration formalities with the
local foreign exchange authority within twenty working days prior to the intended share increase or decrease.
Pursuant
to the Notice on Administration of Foreign Exchange Involved in Offshore Investment, Financing and Round-Trip Investment Conducted by
Domestic Residents Through Special Purpose Vehicles, which was promulgated by SAFE and went into effect on July 4, 2014, prior to making
capital contribution in a special purpose vehicle by a PRC resident using its legitimate assets or interests in the PRC or overseas,
the PRC resident shall apply to the foreign exchange bureau for completion of foreign exchange registration formalities for overseas
investments. A “domestic entity” referred to in this notice shall mean enterprise and institutional legal persons and any
other economic organizations established in the PRC pursuant to the law; a “PRC resident individual” shall mean a PRC citizen
holding a PRC resident identity document, military personnel identity document or armed police personnel identity document, and any foreign
individual who does not hold a PRC identity document but normally resides in the PRC due to economic reasons.
Pursuant
to the Notice on Further Simplification and Improvement of Foreign Exchange Administration Policies for Direct Investment, promulgated
by SAFE on February 13, 2015 and effective June 1, 2015, two administrative approval matters, including foreign exchange registration
approval under domestic direct investment and foreign exchange registration approval under overseas direct investment, shall be reviewed
and processed directly by banks. SAFE and its local bureaus shall implement indirect supervision through the foreign exchange registration
with banks for direct investment.
Pursuant
to the Notice of SAFE on Reforming the Mode of Management of Settlement of Foreign Exchange Capital of Foreign-Funded Investment Enterprises
promulgated on March 30, 2015 and effective June 1, 2015, and the Notice of SAFE on Reforming and Regulating the Policies for Administration
of Foreign Exchange Settlement under the Capital Account promulgated on and effective June 9, 2016, the system of voluntary foreign exchange
settlement is implemented for the foreign exchange earnings of foreign exchange capital of foreign-invested enterprises. Foreign exchange
capital in a foreign-invested enterprise capital account, for which the monetary contribution has been confirmed by SAFE (or for which
the monetary contribution has been registered for account entry), may be settled at a bank as required by the actual management needs
of the enterprise. The voluntary settlement ratio of foreign-invested enterprise foreign exchange capital projects has been temporarily
set at 100%. SAFE may make adjustments to the said ratio at appropriate times based on the status of the international balance of payments.
In addition, foreign exchange earnings under capital projects and the Renminbi funds obtained from the exchange settlements thereof shall
not be used by foreign-invested enterprises for the following purposes: (1) direct or indirect payments of expenditures exceeding its
business scope or those being prohibited by the laws and regulations of the PRC; (2) direct or indirect uses in securities investments
or investments other than capital-protected banking products (except as otherwise expressly provided); (3) issuance of loans to non-affiliated
enterprises (excluding those that are expressly permitted within their business scope); and (4) construction or purchase of real estate
not for personal use (except for real estate enterprises).
Foreign
Investment
In
March 2019, the Standing Committee of the National People’s Congress of the PRC passed the Foreign Investment Law of the People’s
Republic of China, or the Foreign Investment Law. Among other things, the Foreign Investment Law defines the “foreign investment”
as the investment activities in China conducted by foreign individuals, enterprises and other organizations, or the Foreign Investors,
in a direct or indirect manner. The PRC governmental authorities will administrate foreign investment by applying the principal of pre-entry
national treatment together with a negative list, to be specific, the Foreign Investors are prohibited from making any investments in
the fields catalogued into prohibited industries for foreign investment based on the negative list, while they are allowed to make investments
in the restricted industries provided that all the requirements and conditions as set forth in the negative list have been satisfied;
when the Foreign Investors make investments in the fields other than those included in the negative list, the national treatment principle
shall apply.
Pursuant
to the Special Administrative Measures for Access of Foreign Investment (2020 Edition), or the 2020 Edition Negative list, issued by
the MOFCOM and the NDRC on June 23, 2020 which came into effect on July 23, 2020, our business does not fall into the negative list and
is permitted for foreign investment.
Outbound
Investment
Pursuant
to the Measures for Administration of Overseas Investment of Enterprises promulgated by the NDRC on December 26, 2017 and effective March
1, 2018, investors shall perform procedures such as overseas investment project approval and filing, report relevant information, and
cooperate in supervision and inspections when they conduct overseas investments. Projects subject to approval by the NDRC are sensitive
projects developed by investors, either directly or through their control of overseas enterprises. Projects subject to filing are non-sensitive
projects directly developed by investors, in which the investors directly invest assets or equities, or provide financing or guarantees.
Pursuant
to the Measures for Administration of Overseas Investment Management promulgated on September 6, 2014 and effective October 6, 2014,
filing and approval are managed by the MOFCOM and its provincial bureaus in light of the different circumstances of overseas investments
of enterprises. Approval is required for enterprises conducting overseas investments involving sensitive countries and regions or sensitive
industries. Filing will be administered for enterprises conducting overseas investments in other circumstances.
Laws
and Regulations Relating to Environmental Protection
Pursuant
to the Environmental Protection Law of the PRC issued on December 26, 1989, amended on April 24, 2014 and effective January 1, 2015,
entities that cause environmental pollution and other public nuisances shall adopt effective measures to prevent the pollution of and
hazards caused to the environment. Construction projects shall be equipped with constructional environmental protection facilities, which
must be simultaneously designed, built and put into operation with the main part of the construction. Enterprises discharging pollutants
must report to and register with the relevant authorities in accordance with the provisions of the competent environmental protection
authority under the State Council. The competent environmental protection authority shall record unlawful environmental acts of enterprises
in the social credit file, and disclose information in a timely manner. Enterprises and other producers and operators unlawfully discharging
pollutants shall be fined and ordered to take corrective measures. For those refusing to make corrections, the competent authority may,
starting from the day after the date of ordering correction, continuously impose daily fines based on the sum of the original fine. Enterprises
and other producers and operators, which discharge pollutants exceeding the pollutant discharge standard or key pollutant gross discharge
control thresholds, may be ordered by the competent environmental protection authority above the provincial level to take measures such
as restricting production, suspending production and rectification. Serious cases may be reported to and approved by the competent government
authority, resulting in orders of suspension or shutdown of operations.
Pursuant
to the Environmental Impact Assessment Law of the PRC issued on October 28, 2002, amended on and effective December 29, 2018, the PRC
government implemented an environmental impact evaluation system, which classifies and manages the environmental impact evaluation of
construction projects based on the degree of environmental impact caused by construction projects.
Pursuant
to the Administrative Regulations on Environmental Protection in Construction Projects promulgated on November 11, 1998 and amended on
July 16, 2017, construction projects are classified and environmental impact reports, environmental impact statements or environmental
impact registration forms shall be compiled based on the extent of environmental impact of construction projects. For a construction
project for which an environmental impact report or environmental impact statement is prepared, its matching environmental protection
facilities may go into production or be delivered for use only after they pass the acceptance check; and they may not go into production
or be delivered for use if no acceptance check is made for them or they fail to pass the acceptance check. Where a construction project
goes into production or is delivered for use without the completion of construction of matching environmental protection facilities required
for the construction project, without going through acceptance checks or without passing the acceptance checks in violation of the provisions
hereof, or fraud is committed in the acceptance check of the environmental protection facilities, the competent administrative department
of environmental protection at or above the county level shall order the construction unit to effect rectification within a specified
time limit and impose a fine of more than RMB 200,000 but less than RMB 1 million against it; if it fails to effect rectification within
the time limit, a fine of more than RMB 1 million but less than RMB 2 million shall be imposed; the person in charge who is held directly
liable and other liable persons shall be subject to a fine of more than RMB 50,000 but less than RMB 200,000; if material environmental
pollution or ecological damage is caused, the construction unit will be ordered to stop production or use of the construction project,
or be ordered to close down upon approval by the people’s government with the authority of approval.
Laws
and Regulations Relating to Taxation
Enterprise
Income Tax
Pursuant
to the EIT Law promulgated on March 16, 2007, amended on and effective December 29, 2018, and the Regulation on Implementation of the
Enterprise Income Tax Law of the PRC, or the EIT Implementation Rules, issued on December 6, 2007 and effective April 23, 2019, EIT shall
be applicable at a uniform rate of 25% to all resident or non-resident enterprises. EIT shall be payable by a resident enterprise for
income sourced within or outside the PRC. EIT shall be payable by a non-resident enterprise, for income sourced within the PRC by its
institutions or premises established in the PRC, and for income sourced outside the PRC for which the institutions or premises established
in the PRC have a de facto relationship. Where the non-resident enterprise has no institutions or premises established in the PRC or
has income bearing no de facto relationship with the institution or premises established, EIT shall be payable by the non-resident enterprise
only for income sourced within the PRC.
Pursuant
to the Administrative Measures on the Accreditation of High and New Technology Enterprises accredited high and new technology may make
declarations under and benefit from tax concession policies in accordance with relevant regulations including the EIT Law and the EIT
Implementation Rules, the Law of the PRC on Administration of Levying and Collection of Taxes and the Regulation of Implementation of
the Law of the PRC on Administration of Levying and Collection of Taxes.
Pursuant
to the Notice on Enterprise Income Tax Policies for Further Encouraging the Development of Software and Integrated Circuit Industries,
IC production enterprises with an IC production line below 0.8 micrometer (inclusive), after accreditation, shall be entitled to a tax
concession period beginning in the profit-making year that is prior to December 31, 2017, for which EIT shall be exempted for the first
and second years and be reduced by 50% in the third to fifth years. In addition, IC production enterprises with an IC production line
below 0.25 micrometer or an investment of over RMB8 billion, after accreditation, shall be entitled to a reduced EIT tax rate at 15%,
and, for those with an operation period of over 15 years, the tax concession period shall be deemed to start from the profit-making year
prior to December 31, 2017, for which EIT shall be exempted in the first to fifth years and be reduced by 50% in the sixth to tenth years.
As for IC design enterprises newly established within the PRC and eligible software enterprises, upon accreditation, the tax concession
period shall be deemed to start from the profit-making year prior to December 31, 2017, for which EIT shall be exempted for the first
and second years and be reduced by 50% in the third to fifth years.
Value-Added
Tax
Pursuant
to the Provisional Regulation on Value-Added Tax of the PRC promulgated by the State Council, as amended on November 10, 2008, January
8, 2011, February 6, 2016 and November 19, 2017 and effective November 19, 2017, all entities and individuals in the PRC engaging in
the sales of goods, provision of processing services, repairs and replacement services, sales services, intangible assets, real estate
and the importation of goods are required to pay value added tax, or VAT. Unless otherwise stated, the rate of VAT shall be 17%.
Pursuant
to the Notice on Value-Added Tax Policies of Software Products, a general taxpayer who sells self-developed software products and subject
to VAT at a rate of over 3% may, after being taxed at the fixed tax rate of 17%, enjoy VAT refund.
According
to the Circular of the Ministry of Finance and the SAT on Adjusting Value-added Tax Rates, where a taxpayer engages in a taxable sales
activity for the value-added tax purpose or imports goods, the previous applicable 17% and 11% tax rates are lowered to 16% and 10% respectively.
According
to the Circular on Policies to Deepen Value-added Tax Reform, where a taxpayer engages in a taxable sales activity for the value-added
tax purpose or imports goods, the previous applicable 16% and 10% tax rates are lowered to 13% and 9% respectively.
Tax
on Dividends
Pursuant
to the EIT Law and the EIT Implementation Rules, except as otherwise provided by relevant tax treaties with the PRC government, dividends
paid by foreign-invested investment enterprises to foreign investors which are non-resident enterprises and which have not established
or operated premises in the PRC, or which have established or operated premises but where their income has no de facto relationship with
such establishment or operation of premises shall be subject to a withholding tax of 10%. Pursuant to the Arrangement between Mainland
China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
Respect to Taxes on Income entered into between the PRC government and the Hong Kong Special Administrative Region, where the beneficial
owner is a company directly holding at least 25% of the equity interest of the company paying the dividends, the tax charged shall not
exceed 5% of the distributed dividends. In any other case, the tax charged shall not exceed 10% of the distributed dividends.
Pursuant
to the Announcement on Issues Relating to “Beneficial Owner” in Tax Treaties promulgated by the SAT on February 3, 2018 and
came effective April 1, 2018, a “beneficial owner” shall mean a person who has ownership and control over the income, and
the rights and property from which the income is derived. Upon the determination of the “beneficial owner” status of a resident
of the treaty counterparty who needs to enjoy the tax treaty benefits (hereinafter referred to as the “applicant”), a comprehensive
analysis shall be conducted taking into account the actual conditions of the specific case. In general, the following factors are unfavorable
for the determination of “beneficial owner” status of an applicant: (1) the applicant is obligated to pay 50% or more of
the income, within 12 months from its receipt, to a resident of a third country (region), where the term “obligated” includes
agreed obligations and de facto payment for which there is no agreed obligation; (2) the business activities undertaken by the applicant
do not constitute substantive business activities, where substantive business activities shall include manufacturing, distribution and
management activities of a substantive nature, the determination of whether the business activities undertaken by the applicant are of
a substantive nature shall be based on the functions actually performed and the risks borne, and investment holding management activities
of a substantive nature undertaken by the applicant may constitute substantive business activities (where the applicant undertakes investment
holding management activities which do not constitute substantive business activities, and simultaneously undertakes other business activities,
if such other business activities are not sufficiently significant, these shall not constitute substantive business activities); (3)
the treaty counterparty country (region) does not levy, or exempts tax on the relevant income, or levies tax but with a very low actual
tax rate; (4) in addition to the loan contract based on which interest is derived and paid, there exists other loans or deposit contracts
between the creditor and the third party, of which factors such as the amount, interest rate and date of execution are similar; and (5)
in addition to the transfer contract for rights to use such as copyright, patent, technology, from which the royalties are derived and
paid, there exists other transfer contracts for rights to use or ownership in relation to copyright, patent, technology between the applicant
and a third party.
Pursuant
to the Notice of the SAT on the Relevant Issues Concerning the Implementation of Dividend Clauses in Tax Treaties promulgated by the
SAT and effective February 20, 2009, all of the following conditions shall be satisfied before the concession tax rate in a tax treaty
can be enjoyed: (1) the tax resident obtaining dividends shall be restricted to the company as provided in the tax treaty; (2) among
all the ownership equity interests and voting shares of the PRC resident company, the proportion directly owned by the tax resident complies
with the prescribed proportions under the tax treaty; and (3) the proportion of the equity interests of the PRC resident company directly
owned by such tax resident complies with, at all times within the twelve months before obtaining the dividends, the proportions specified
in the tax treaty.
Pursuant
to the Announcement of the State Taxation Administration on Issuing the Administrative Measures for Entitlement to Treaty Benefits for
Non-resident Taxpayers promulgated by the SAT on October 14, 2019 and effective January 1, 2020, entitlement to treaty benefits for non-resident
taxpayers shall be handled by means of “self-judgment of eligibility, declaration of entitlement, and retention of relevant materials
for future reference”. Where non-resident taxpayers judge by themselves that they meet the conditions for entitlement to treaty
benefits, they may obtain such entitlement themselves at the time of making tax declarations, or at the time of making withholding declarations
via withholding agents. At the same time, they shall collect, gather and retain relevant materials for future reference in accordance
with the provisions of these Measures, and shall accept the follow-up administration of tax authorities. Relevant information proving
the status of “beneficial owner” shall be retained in the case of entitlement to dividends, interest and treaty benefits
of royalty clauses.
Laws
and Regulations Relating to Labor and Social Security
Pursuant
to the Labor Law of the PRC promulgated on July 5, 1994 and amended on and effective December 29, 2018, companies must negotiate and
enter into employment contracts with their employees based on the principle of fairness. Companies must establish and strengthen an employment
hygiene system, strictly implement the national labor safety and health rules and standards, deliver occupational health and safety education
to employees, prevent work-related accidents, and reduce occupational hazards. In addition, employers and employees shall purchase social
insurances and pay for social insurance fees in compliance with applicable PRC laws.
Labor
Contracts
The
Labor Contract Law of the PRC, which was promulgated on June 29, 2007 and subsequently amended on December 28, 2012 and effective July
1, 2013, serves as the primary law regulating the labor contract relationship between companies and employees. Pursuant to this law,
an employment relationship is established between the employer and the worker since the day of employment. The employer shall execute
a written employment contract with the worker. Furthermore, to safeguard the legal rights and interests of workers, the way to calculate
compensation for the probation period and for damages shall be subject to the provisions of the law.
Social
Security and Housing Provident Fund
As
required under the Social Insurance Law of the PRC promulgated on and effective December 29, 2018, the Regulation on Work-Related Injury
Insurance promulgated on April 27, 2003, amended on December 20, 2010 and effective January 1, 2011, the Provisional Measures on Insurance
for Maternity of Employees promulgated on and effective December 14, 1994 and implemented on January 1, 1995, and the Regulation on Administration
of Housing Provident Funds promulgated on April 3, 1994 and last amended on and effective March 24, 2019, employers and employees within
the PRC shall pay for social insurance fees and housing provident funds in compliance with applicable PRC laws.
Laws
and Regulations Relating to Intellectual Property
Trademarks
Pursuant
to the Trademark Law of the PRC promulgated on August 23, 1982, amended on April 23, 2019 and effective November 1, 2019 and the Regulation
on Implementation of the Trademark Law of the PRC amended on April 29, 2014 and effective May 1, 2014, the right to the exclusive use
of a registered trademark is limited to the approved trademark registration, and to goods for which the use of the trademark has been
approved. The period of validity of registered trademarks lasts for ten years from the day of registration approval. Absent the authorization
by the owner of the registered trademark, the use of the registered trademark or a similar trademark on the same category of goods or
similar goods constitutes an infringement of the right to exclusive use of the registered trademark. The infringer shall, in accordance
with the relevant regulations, cease the infringement activities, take correction actions, and compensate for losses.
Patents
Pursuant
to the Patent Law of the PRC promulgated on March 12, 1984, last amended on December 27, 2008 and effective October 1, 2009, and the
Rules for the Implementation of the Patent Law of the PRC amended on January 9, 2010 and effective February 1, 2010, after the grant
of the patent right for inventions and utility models, except otherwise regulated under the Patent Law, no entity or individual may,
without the authorization of the patent owner, exploit such patent, that is to manufacture, use, offer to sell, sell or import the patented
product, or use the patented process, and use, offer to sell, sell or import products directly obtained from such patented process, for
production or business purposes. After the patent right is granted for a design, no unit or individual shall, without the authorization
of the patent owner, exploit such patent, that is to manufacture, offer to sell, sell, or import any product containing such patented
design for production or business purposes. Where infringement has been established, the infringer shall, in accordance with the relevant
regulations, be ordered to cease the infringement activities, take corrective actions, and compensate for losses.
Copyrights
Pursuant
to the Copyright Law of the PRC promulgated on September 7, 1990, last amended on February 26, 2010 and effective April 1, 2010, works
of PRC citizens, legal persons or other organizations shall, regardless of whether they have been published, be entitled to the copyright
pursuant to this law. Works include written works; oral works; musical, dramatic, opera, dance, acrobatic and artistic works; visual
arts, architectural works; photographic works; film works and works created using methods similar to film-making; graphical works and
modeling works such as engineering design graphs, product design graphs, maps and schematic diagrams; computer software; and other works
stipulated by legal and administrative regulations.
Pursuant
to the Regulation on Protection of Computer Software promulgated on December 20, 2001, last amended on January 30, 2013 and effective
date on March 1, 2013, software copyright is conferred on the software development completion date. The protection period for a software
copyright of a legal person or other organizations lasts for 50 years, concluding on the day of December 31 in the 50th year after the
initial release of the software. However, in the case where the software has not been released within 50 years from its development completion
date, protection shall no longer be offered by these regulations. A software copyright holder may register with competent software registration
authority under the State Council Copyright Administrative Department. Registration certification documents issued by the competent software
registration authority serve as the prima facie proof of such registration.
IC
Layout Designs
Pursuant
to the Regulation on the Protection of Integrated Circuit Layout Designs promulgated on April 2, 2001 and implemented on October 1, 2001,
and the Protection of Integrated Circuit Layout Designs Regulations Implementing Rules promulgated on September 18, 2001 and effective
October 1, 2001, layout design proprietary right holders enjoy the following proprietary rights: to duplicate the whole or any part of
the protected layout designs that is original; to make commercial use of the protected layout designs, ICs containing such layout designs,
or items containing such ICs.
Regulatory
Overview of United States
The following sets forth
a description of certain laws, regulations and government policies relating to cryptocurrencies and cryptocurrency mining in the United
States, which we consider a key market for our overseas business; however, we do not have any current plans to operate any regulated
business in the United States.
We
are not aware of any law that currently makes it per se illegal for a natural person or entity simply to possess, sell, or trade Bitcoin
on its own behalf in connection with lawful transactions in the United States, provided that any transaction complies generally with
applicable law. We are also not aware of any United States federal law that currently prohibits any legal entity or natural person from
importing BPUs into the United States or manufacturing or selling BPUs within the United States. Nonetheless, in the United States, both
the federal government and individual states have regulations in place that govern the offer, sale, and transmission of various types
of cryptocurrency, including but not limited to Bitcoin, and the legal status of Bitcoin and other cryptocurrencies continues to evolve.
The
United States Commodity Futures Trading Commission, or CFTC, has taken the position that crypto currencies, such as Bitcoin, are “commodities”
covered by the Commodity Exchange Act and subject to regulation by the CFTC. In March 2018, a United States federal court affirmed the
CFTC’s authority to regulate cryptocurrencies. This means that the CFTC has jurisdiction over any futures, options or derivatives
contracts involving cryptocurrencies as well as any fraud or manipulation involving cryptocurrencies in the spot market. Our products
are not intended to be used either for any futures, options or derivatives trading or to enable fraud or manipulation. However, to the
extent that any mining activity using our products were to be deemed a form of fraud or manipulation, or our products were otherwise
used for fraud or manipulation, we could potentially be subject to regulatory or private actions related to those uses.
In
addition, while the SEC has taken the position that Bitcoin, Ether, and certain cryptocurrencies subject to significant operational restrictions
are not “securities” regulated by the federal securities laws, it is likely that the SEC will view almost all other cryptocurrencies
other than Bitcoin and Ether that can be mined to be “securities,” based on their status as “investment contracts”
under the guidance provided by the SEC “Framework for ‘Investment Contract’ Analysis of Digital Assets,” and
the application of the test under SEC v. W. J. Howey Co. (the “Howey test”) to cryptocurrencies.
It is similarly likely that these other cryptocurrencies will be treated as securities under the laws of the individual states.
The
status of additional cryptocurrencies as securities could impose significant restrictions on us or our customers with operations that
are located in the United States or involve United States residents. Typically, offerings and distributions of securities in the United
States are required to register with the SEC under the Securities Act and, in compliance with state law, with applicable state regulators.
If the offering of a cryptocurrency that can be mined using our products is deemed a security, miners may be required to cease mining
that cryptocurrency, which would negatively affect our business. In addition, if the Company were viewed as facilitating an illegal distribution
of a cryptocurrency, the Company could have liability associated with its product sales. Further, even if a cryptocurrency that is considered
to be a security is legally distributed under the US securities laws, the miners of that cryptocurrency could be viewed as statutory
underwriters or as “brokers” subject to regulation under the Exchange Act because they are effecting transactions in those
securities for a fee (i.e., mining rewards). This outcome would again potentially reduce the viability of our product sales and could
also result in the Company incurring liability. Any of these developments could limit the future development of our business. See “Item
3. Key Information—D. Risk Factors—Risks Relating to Our Business and Industry—The current regulatory environment in
foreign markets, and any adverse changes in that environment, could have a material adverse impact on our blockchain products business
and our planned cryptocurrency exchange and financial service platform businesses.”
Further,
the Department of the Treasury’s Financial Crimes Enforcement Network, or FinCEN, regulates “money transmitters,” including
certain administrators and exchangers of cryptocurrencies, and state laws also regulate money transmission; more generally, cryptocurrency
transactions may implicate a variety of federal and state laws designed to counter money laundering. In that regard it should be noted
that U.S. Secretary of the Treasury Steven Mnuchin has indicated that federal regulators are specifically looking for potential money
laundering activities involving cryptocurrency.
In
addition, Internal Revenue Service Notice 2014-21 states that at federal level, “the sale or exchange of convertible virtual currency,
or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that
may result in a tax liability.” Under Notice 2014-21, cryptocurrencies are treated as “property” for U.S. federal tax
purposes and this position was reaffirmed by the IRS in a reminder issued in March 2018 (IR-2018-71). Mining, selling, and transacting
in cryptocurrencies are all potentially taxable events for U.S. federal income tax purposes. U.S. state taxing authorities may adopt
similar views on the taxability of cryptocurrencies.
Sanctions
Laws and Regulations
Following
is a summary of the sanctions regime imposed by the United States. This summary does not intend to set out the laws and regulations relating
to the United States sanctions in their entirety.
Treasury
Regulations
OFAC
is the primary agency responsible for administering U.S. sanctions programs against targeted countries, entities, and individuals. “Primary”
U.S. sanctions apply to “U.S. persons” or activities involving a U.S. nexus (such as funds transfers in U.S. currency or
activities involving U.S. origin goods, software, technology or services even if performed by non-U.S. persons), and “secondary”
U.S. sanctions apply extraterritorially to the activities of non-U.S. persons even when the transaction has no U.S. nexus. Generally,
U.S. persons are defined as entities organized under U.S. law (such as companies and their U.S. subsidiaries); any U.S. entity’s
domestic and foreign branches (sanctions against Iran and Cuba also apply to U.S. companies’ foreign subsidiaries or other non-U.S.
entities owned or controlled by U.S. persons); U.S. citizens or permanent resident aliens (“green card” holder), regardless
of their location in the world; individuals physically present in the United States; and U.S. branches or U.S. subsidiaries of non-U.S.
companies.
Depending
on the sanctions program and/or parties involved, U.S. law also may require a U.S. company or a U.S. person to “block,” or
freeze, any assets or property interests owned, controlled or held for the benefit of a sanctioned country, entity, or individual when
such assets or property interests are in the United States or within the possession or control of a U.S. person. Upon such blocking,
no transaction may be undertaken or effected with respect to the asset/property interest — no payments, benefits, provision of
services or other dealings or other type of performance (in case of contracts/agreements) — except pursuant to an authorization
or license from OFAC.
OFAC’s
comprehensive sanctions programs currently apply to Cuba, Iran, North Korea, Syria, Venezuela, and the Crimea region of Russia/Ukraine,
or the Comprehensively Sanctioned Countries. OFAC’s limited programs apply to Belarus, Burundi, Central African Republic, Democratic
Republic of the Congo, Iraq, Lebanon, Libya, Mali, Nicaragua, Somalia, South Sudan, Russia, Ukraine, Yemen and Zimbabwe. OFAC also prohibits
virtually all business dealings with persons and entities identified in the list of Specially Designated Nationals and Blocked Persons
maintained by OFAC, or the SDN List. Entities that a party on the SDN List owns (defined as a direct or indirect ownership interest of
50% or more, individually or in the aggregate) are also blocked, regardless of whether that entity is expressly named on the SDN List.
Additionally, U.S. persons, wherever located, are prohibited from approving, financing, facilitating, or guaranteeing any transaction
by a non-U.S. person where the transaction by that non-U.S. person would be prohibited if performed by a U.S. person or within the United
States.
Export
Control Regulations
The
purpose of the export control regulations is to control exports and re-exports for purposes of national security, foreign policy, short
supply, reduction of nuclear proliferation, limitation of chemical or biological warfare, antiterrorism, crime control, enforcement of
economic embargoes, compliance with United Nations resolutions and other purposes. These laws apply to both the export of tangible products
as well as the export of technology, technical data, software, trade secrets and similar types of information. These programs are administered
by various U.S. agencies. Sanctions for violations of these regulations include civil and criminal penalties — criminal sanctions
are often imposed on both corporate defendants and officers, directors and employees of the corporation in their personal capacities.
Export
Administration Regulations
In
the United States, the principal program for the federal regulation of exports is under the U.S. Export Administration Regulations, or
the EAR. The EAR controls the export and re-export of U.S.-origin products and technologies from the United States. The EAR prohibits
the export of certain goods, software and technologies identified therein to specific foreign countries or require exporters to obtain
export licenses for the export of such items. The EAR incorporate the Commerce Control List, a list of approximately 3,000 items, which
are subject to export restrictions. Items on the Commerce Control List are prohibited from export to certain destinations unless an export
license is issued by the U.S. Department of Commerce. Items on the Commerce Control List include products, software and technology. Examples
of products that are subject to export licensing include electronic navigation control systems, computer aided design devices (CAD-CAM),
high performance computers, network components (routers, hubs, servers), computerized telecommunications switches and high performance
composite materials. The EAR also control the “re-export” of products manufactured in foreign countries which incorporate
more than a de minimis amount of U.S. content or which are based on certain U.S. –origin technologies. Finally, the EAR also prohibit
the export of any item that will be used in any prohibited end-use.
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C.
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Organizational
structure
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We
are an exempted company incorporated pursuant to the laws of Cayman Islands. We operate and own our assets directly and indirectly through
a number of subsidiaries.
Ebang
International Holdings Inc. is a holding company incorporated in Cayman Islands which does not have substantive operations. We conduct
our businesses through our subsidiaries. Our principal subsidiaries consist of the following entities (in chronological order based on
their dates of incorporation):
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●
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Zhejiang Ebang Communication
Technology Co., Ltd., or Zhejiang Ebang, our majority-owned subsidiary and an onshore holding company established in the PRC on January
21, 2010 principally for holding our businesses in the design, manufacture and sale of telecommunications and blockchain processing
equipment;
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|
●
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Zhejiang Ebang Information
Technology Co., Ltd., or Ebang IT, our majority-owned subsidiary and an operating entity established in the PRC on August 11, 2010
principally for the design, manufacture and sale of telecommunications and blockchain processing equipment;
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●
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Hangzhou Dewang Information
Technology Co., Ltd., or Hangzhou Dewang, our majority-owned subsidiary and an operating entity established in the PRC on December
31, 2015 principally for the design and manufacture of blockchain chips;
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●
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Ebang Communications (HK)
Technology Limited, or HK Ebang Communications, formerly known as Hong Kong Bite Co., Ltd., our wholly-owned subsidiary and an operating
entity established in Hong Kong on February 12, 2016 principally for the trading of blockchain chips;
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|
●
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Yunnan Ebang Information
Technology Co., Ltd., or Yunnan Ebang, our majority-owned subsidiary and an operating entity established in the PRC on June 28, 2016
principally for the assembly line of blockchain processing equipment and warehouse;
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●
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Wuhai Ebang Information
Technology Co., Ltd., or Wuhai Ebang, our wholly-owned subsidiary and an operating entity established in the PRC on September 18,
2017 principally for the assembly line of blockchain processing equipment; and
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|
●
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Hangzhou Ebang Jusheng
Technology Co., Ltd., or Ebang Jusheng, our wholly-owned subsidiary and an operating entity established in the PRC on January 3,
2018 principally for the trading of telecommunications and blockchain processing equipment.
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As
of the date of this annual report, we conduct our business operations primarily through 18 major subsidiaries and our subsidiaries in
Korea, Australia, Singapore and Canada. Hong Kong Ebang Digital Technology Limited, Hangzhou Ebang Shuotai Technology Co., Ltd., or Ebang
Shuotai, and Shanghai Yijiaxin IC Design Co., Ltd. do not have any substantive operations.
The
chart below summarizes our corporate structure and identifies the principal subsidiaries described above as of the date of this annual
report:
(1)
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The remaining 48.95% equity
interests are owned by Huzhou Meiman Investment Management LLP, an unaffiliated third party.
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(2)
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On December 16, 2020, an
affiliate controlled by Mr. Dong Hu, our chairman of the board of directors and Chief Executive Officer, acquired 0.0036% of the
equity interests in Zhejiang Ebang Communication Technology Co., Ltd.
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|
D.
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Property,
plants and equipment
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Our
business operation is headquartered in Hangzhou, Zhejiang. We also currently occupy properties in other locations in China, including
(1) other research and development bases in Shanghai and Wuhan, (2) two production facilities in Hangzhou and Wuhai, and (3) sales offices
in Hangzhou, Shijiazhuang, Changsha, Guangzhou, Taizhou and Shenyang.
In
addition, we are constructing our new headquarters in Yuhang District, Hangzhou which will comprise expanded production, research and
development and office space, among other uses, in order to support our business growth. We have also acquired land and have substantially
completed construction of the building for this new assembly facility in Wuhai, Inner Mongolia. For more information on our expansion
plan and the related properties, see “—Owned Properties.”
Leased
Properties
The
total gross floor area, or GFA, of our leased properties is approximately 13,803 square meters, or sq.m, out of which, approximately
7,344 are for production facilities and 6,459 are for research and development, sales and other offices. Our lease agreements typically
have a term of one to three years.
Owned
Properties
As
of December 31, 2020, we owned properties in three locations in China with a total GFA of approximately 48,087.68 sq.m. The following
table sets forth the GFA of all properties owned by us:
Location
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|
Approximate
GFA
|
|
|
|
(sq.m.)
|
|
Completed
|
|
|
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Wuhan, Hubei (research and development center)
|
|
|
390.68
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Wuhai, Inner Mongolia(1)
|
|
|
14,200
|
|
Pending construction
|
|
|
|
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Hangzhou, Zhejiang (Yuhang District)(2)
|
|
|
33,497
|
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Total
|
|
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48,087.68
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(1)
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We acquired the land and
constructed the building for a new production facility to further increase our production capacity. As part of assessing the feasibility
of such potential production facility, we commenced trial operations of a product assembly line on a temporary site in Wuhai in July
2018. As of the date of this annual report, such assembly line is still under trial operation.
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(2)
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We have acquired this land
from the government by way of public tender. We have made full payment of RMB17.6 million for the purchase price and have obtained
the land use right certificate. We plan to construct a large production facility, a new headquarters office, a research and development
facility and staff dormitory on this land and, upon completion of the construction, we will relocate our existing headquarters and
leased production facility in Hangzhou to this new location. Construction is anticipated to be completed by the end of 2021.
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We
believe that we have adequate facilities, through a combination of leased and owned properties, to accommodate our business operations
and future expansion plans.
ITEM 10.
ADDITIONAL INFORMATION
Not
applicable.
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B.
|
Memorandum
and articles of association
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We
are an exempted company incorporated under the laws of the Cayman Islands and our affairs are governed by our amended and restated
memorandum and articles of association, as amended and restated from time to time, and Companies Act (2021 Revision) of the Cayman
Islands, which we refer to as the Companies Act below, and the common law of the Cayman Islands.
The
following are summaries of material provisions of our amended and restated memorandum and articles of association and the Companies
Act (2021 Revision) of the Cayman Islands insofar as they relate to the material terms of our ordinary shares.
Ordinary
Shares
General
Under
our amended and restated memorandum and articles of association, the objects of our company are unrestricted and we have the full
power and authority to carry out any object not prohibited by the law of the Cayman Islands.
Our
issued and outstanding ordinary shares consist of Class A ordinary shares and Class B ordinary shares. All of our outstanding
ordinary shares, which consist of Class A ordinary shares and Class B ordinary shares, are fully paid and non-assessable. Certificates
representing the ordinary shares are issued in registered form. Our shareholders who are non-residents of the Cayman Islands may
freely hold and transfer their ordinary shares.
Holders
of our Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. The Class
A ordinary shares and Class B ordinary shares carry equal rights and rank pari passu with one another, including the rights
to dividends and other capital distributions.
Conversion
Each
Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares
are not convertible into Class B ordinary shares under any circumstances. Upon any sale of Class B ordinary shares by a holder
thereof to any person or entity that is not an affiliate (as defined in our amended and restated articles of association) of such
holder, such Class B ordinary shares will be automatically and immediately converted into an equal number of Class A ordinary
shares.
Voting
Rights
On
a show of hands each shareholder is entitled to one vote or, on a poll, each shareholder is entitled to one vote for each Class
A ordinary share and 20 votes for each Class B ordinary share, voting together as a single class, on all matters that require
a shareholder’s vote. Voting at any shareholders’ meeting is by show of hands of shareholders who are present in person
or by proxy or, in the case of a shareholder being a corporation, by its duly authorized representative, unless a poll is demanded.
A
poll may be demanded by the chairman of such meeting or any shareholder present in person or by proxy.
No
shareholder shall be entitled to vote or be reckoned in a quorum, in respect of any share, unless such shareholder is duly registered
as our shareholder and all calls or instalments due by such shareholder to us have been paid.
An
ordinary resolution to be passed at a general meeting requires the affirmative vote of a simple majority of the votes cast, while
a special resolution requires the affirmative vote of at least two-thirds of votes attached to all outstanding ordinary shares
cast at a general meeting.
Transfer
Agent and Registrar
The
transfer agent and registrar for the Class A ordinary shares is VStock Transfer, LLC, a California limited liability company with
its business address at 18 Lafayette Place Woodmere, New York 11598.
General
Meetings of Shareholders
Our
amended and restated memorandum and articles of association provides that our company shall in each year hold a general meeting
as our annual general meeting in which case we shall specify the meeting as such in the notices calling it, and the annual general
meeting shall be held at such time and place as may be determined by our directors.
Shareholders’
meetings may be convened by a majority of our board of directors or the chairman of our board of directors. Advance notice of
at least ten clear days is required for the convening of our annual general meeting and any other general meeting of our shareholders.
Notwithstanding that a meeting is called by shorter notice than that mentioned above, but, subject to the Companies Act, it will
be deemed to have been duly called, if it is so agreed (1) in the case of a meeting called as an annual general meeting by all
of our shareholders entitled to attend and vote at the meeting; and (2) in the case of any other meeting, by a majority in number
of the shareholders holding not less than 95% in nominal value of the issued shares giving that right.
No
business other than the appointment of a chairman may be transacted at any general meeting unless a quorum is present at the commencement
of business. However, the absence of a quorum will not preclude the appointment of a chairman. If present, the chairman of our
board of directors shall be the chairman presiding at any shareholders’ meetings.
A
corporation being a shareholder shall be deemed for the purpose of our amended and restated articles of association to be present
in person if represented by its duly authorized representative being the person appointed by resolution of the directors or other
governing body of such corporation to act as its representative at the relevant general meeting or at any relevant general meeting
of any class of our shareholders. Such duly authorized representative shall be entitled to exercise the same powers on behalf
of the corporation that he represents as that corporation could exercise if it were our individual shareholder.
Dividends
Subject
to the Companies Act, our directors may declare dividends in any currency to be paid to our shareholders. Dividends may be declared
and paid out of our profits, realized or unrealized, or from any reserve set aside from profits which our directors determine
is no longer needed. Our board of directors may also declare and pay dividends out of the share premium account or any other fund
or account that can be authorized for this purpose in accordance with the Companies Act. Except in so far as the rights attaching
to, or the terms of issue of, any share otherwise provides, (1) all dividends shall be declared and paid according to the amounts
paid up on the shares in respect of which the dividend is paid, but no amount paid up on a share in advance of calls shall be
treated for this purpose as paid up on that share and (2) all dividends shall be apportioned and paid pro rata according to the
amounts paid up on the shares during any portion or portions of the period in respect of which the dividend is paid.
Our
directors may also pay interim dividends, whenever our financial position, in the opinion of our directors, justifies such payment.
Our
directors may deduct from any dividend or bonus payable to any shareholder all sums of money (if any) presently payable by such
shareholder to us on account of calls or otherwise.
No
dividend or other money payable by us on or in respect of any share shall bear interest against us. In respect of any dividend
proposed to be paid or declared on our share capital, our directors may resolve and direct that (1) such dividend be satisfied
wholly or in part in the form of an allotment of shares credited as fully paid up, provided that our shareholders entitled thereto
will be entitled to elect to receive such dividend (or part thereof if our directors so determine) in cash in lieu of such allotment
or (2) the shareholders entitled to such dividend will be entitled to elect to receive an allotment of shares credited as fully
paid up in lieu of the whole or such part of the dividend as our directors may think fit. Our shareholders may, upon the recommendation
of our directors, by ordinary resolution resolve in respect of any particular dividend that, notwithstanding the foregoing, a
dividend may be satisfied wholly in the form of an allotment of shares credited as fully paid up without offering any right to
shareholders to elect to receive such dividend in cash in lieu of such allotment.
Any
dividend interest or other sum payable in cash to the holder of shares may be paid by check or warrant sent by mail addressed
to the holder at his registered address, or addressed to such person and at such addresses as the holder may direct. Every check
or warrant shall, unless the holder or joint holders otherwise direct, be made payable to the order of the holder or, in the case
of joint holders, to the order of the holder whose name stands first on the register in respect of such shares, and shall be sent
at his or their risk and payment of the check or warrant by the bank on which it is drawn shall constitute a good discharge to
us.
All
dividends unclaimed for one year after having been declared may be invested or otherwise made use of by our board of directors
for the benefit of our company until claimed. Any dividend unclaimed after a period of six years from the date of declaration
of such dividend shall be forfeited and reverted to us.
Whenever
our directors have resolved that a dividend be paid or declared, our directors may further resolve that such dividend be satisfied
wholly or in part by the distribution of specific assets of any kind, and in particular of paid up shares, debentures or warrants
to subscribe for our securities or securities of any other company. Where any difficulty arises with regard to such distribution,
our directors may settle it as they think expedient. In particular, our directors may issue fractional certificates, ignore fractions
altogether or round the same up or down, fix the value for distribution purposes of any such specific assets, determine that cash
payments shall be made to any of our shareholders upon the footing of the value so fixed in order to adjust the rights of the
parties, vest any such specific assets in trustees as may seem expedient to our directors, and appoint any person to sign any
requisite instruments of transfer and other documents on behalf of the persons entitled to the dividend, which appointment shall
be effective and binding on our shareholders.
Transfer
of Ordinary Shares
Subject
to any applicable restrictions set forth in our amended and restated articles of association, including, for example, the board
of directors’ discretion to refuse to register a transfer of any share (not being a fully paid up share) to a person of
whom it does not approve, or any share issued under share incentive plans for employees upon which a restriction on transfer imposed
thereby still subsists, or a transfer of any share to more than four joint holders, any of our shareholders may transfer all or
any of his or her shares by an instrument of transfer in the usual or common form or in a form prescribed by the Nasdaq Global
Select Market or in another form that our directors may approve.
Our
directors may decline to register any transfer of any share which is not paid up or on which we have a lien. Our directors may
also decline to register any transfer of any share unless:
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the instrument of
transfer is lodged with us and is accompanied by the certificate for the shares to which it relates and such other evidence
as our directors may reasonably require to show the right of the transferor to make the transfer;
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the instrument of
transfer is in respect of only one class of share;
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the instrument of
transfer is properly stamped (in circumstances where stamping is required); and
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a fee of such maximum
sum as the Nasdaq Global Select Market may determine to be payable or such lesser sum as our directors may from time to time
require is paid to us in respect thereof.
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If
our directors refuse to register a transfer they shall, within three months after the date on which the instrument of transfer
was lodged, send to each of the transferor and the transferee notice of such refusal.
Liquidation
Subject
to any future shares which are issued with specific rights, (1) if we are wound up and the assets available for distribution among
our shareholders are more than sufficient to repay the whole of the capital paid up at the commencement of the winding up, the
excess shall be distributed pari passu among those shareholders in proportion to the amount paid up at the commencement
of the winding up on the shares held by them, respectively, and (2) if we are wound up and the assets available for distribution
among the shareholders as such are insufficient to repay the whole of the paid-up capital, those assets shall be distributed so
that, as nearly as may be, the losses shall be borne by the shareholders in proportion to the capital paid up at the commencement
of the winding up on the shares held by them, respectively.
If
we are wound up (whether the liquidation is voluntary or by the court), the liquidator may with the sanction of our special resolution
and any other sanction required by the Companies Act, divide among our shareholders in specie or kind the whole or any part of
our assets (whether or not they shall consist of property of the same kind) and may, for such purpose, set such value as the liquidator
deems fair upon any property to be divided and may determine how such division shall be carried out as between the shareholders
or different classes of shareholders.
The
liquidator may also vest the whole or any part of these assets in trustees upon such trusts for the benefit of the shareholders
as the liquidator shall think fit, but so that no shareholder will be compelled to accept any assets, shares or other securities
upon which there is a liability.
The
consideration received by each holder of a Class A ordinary share and a holder of a Class B ordinary share will be the same in
any liquidation event.
Calls
on Ordinary Shares and Forfeiture of Ordinary Shares
Subject
to our amended and restated memorandum and articles of association and to the terms of allotment, our board of directors may from
time to time make calls upon shareholders for any amounts unpaid on their ordinary shares in a notice served to such shareholders
at least 14 clear days prior to the specified time of payment. The ordinary shares that have been called upon and remain unpaid
are subject to forfeiture.
Redemption
of Shares, Repurchase and Surrender of Ordinary Shares
We
are empowered by the Companies Act and our amended and restated articles of association to purchase our own shares, subject to
certain restrictions. Our directors may only exercise this power on our behalf, subject to the Companies Act, our amended and
restated memorandum and articles of association and to any applicable requirements imposed from time to time by the Nasdaq Global
Select Market, the Securities and Exchange Commission, or by any other recognized stock exchange on which our securities are listed.
We
may also repurchase any of our shares on such terms and in such manner as have been approved by our board of directors.
Under
the Companies Act, the redemption or repurchase of any share may be paid out of our company’s profits or out of the proceeds
of a fresh issue of shares made for the purpose of such redemption or repurchase, or out of capital (including share premium account
and capital redemption reserve) if the company can, immediately following such payment, pay its debts as they fall due in the
ordinary course of business. In addition, under the Companies Act, no such share may be redeemed or repurchased (1) unless it
is fully paid up, (2) if such redemption or repurchase would result in there being no shares outstanding, or (3) if the company
has commenced liquidation. In addition, our company may accept the surrender of any fully paid share for no consideration.
Variations
of Rights of Shares
If
at any time, our share capital is divided into different classes of shares, all or any of the special rights attached to any class
of shares may, subject to the provisions of the Companies Act, be varied with the sanction of a special resolution passed at a
general meeting of the holders of the shares of that class. Consequently, the rights of any class of shares cannot be detrimentally
altered without a majority of two-thirds of the vote of all of the shares in that class.
The
rights conferred upon the holders of the shares of any class issued with preferred or other rights shall not, unless otherwise
expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the creation or issue of further
shares ranking pari passu with such existing class of shares.
Issuance
of Additional Shares
Our
amended and restated memorandum and articles of association authorizes our board of directors to issue additional ordinary shares
from time to time as our board of directors shall determine, to the extent of available authorized but unissued shares.
Our
amended and restated memorandum and articles of association also authorizes our board of directors to establish from time to time
one or more series of preference shares and to determine, with respect to any series of preference shares, the terms and rights
of that series, including:
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the designation
of the series;
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the number of shares
of the series;
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the dividend rights,
dividend rates, conversion rights, voting rights; and
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the rights and terms
of redemption and liquidation preferences.
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Our
board of directors may issue preference shares without action by our shareholders to the extent authorized but unissued. Issuance
of these shares may dilute the voting power of holders of ordinary shares.
We
have not entered into any material contracts other than in the ordinary course of business and other than those described in “Item 4.
Information on the Company—Recent Financings,” “Item 7. Major Shareholders and Related Party Transactions—B.
Related Party Transactions” or elsewhere in this annual report.
Not
applicable.
The
following discussion of Cayman Islands, PRC and United States federal income tax consequences of an investment in Class A ordinary
shares is based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are
subject to change or differing interpretation, possibly with retroactive effect. This summary does not deal with all possible
tax consequences relating to an investment in our Class A ordinary shares, such as the tax consequences under U.S. state and local
tax laws or under the tax laws of jurisdictions other than the Cayman Islands, the People’s Republic of China and the United
States. To the extent that the discussion relates to matters of Cayman Islands tax law, it represents the opinion of Conyers Dill
& Pearman, our counsel as to Cayman Islands law, and to the extent it relates to PRC tax law, it represents the opinion of
Jingtian & Gongcheng, our counsel as to PRC law.
Cayman
Islands Taxation
The
Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and
there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us or
holders of our ordinary shares levied by the government of the Cayman Islands except for stamp duties which may be applicable
on instruments executed in, or after execution brought within the jurisdiction of, the Cayman Islands.
The
Cayman Islands is a party to a double tax treaty entered into with the United Kingdom in 2010 but otherwise is not party to any
double tax treaties.
There
are no exchange control regulations or currency restrictions in the Cayman Islands.
Pursuant
to Section 6 of the Tax Concessions Act (2018 Revision) of the Cayman Islands, we have obtained an undertaking from the Governor-in-Cabinet:
(1) that
no law which is enacted in the Cayman Islands imposing any tax to be levied on profits or income or gains or appreciation shall
apply to us or our operations; and
(2) that
the aforesaid tax or any tax in the nature of estate duty or inheritance tax shall not be payable on our shares, debentures or
other obligations.
The
undertaking for us is for a period of 20 years from May 24, 2018.
PRC
Taxation
Income
Tax and Withholding Tax
In
March 2007, the National People’s Congress of China enacted the EIT Law, which became effective on January 1, 2008 (as amended
in December 2018). The EIT Law provides that enterprises organized under the laws of jurisdictions outside China with their “de
facto management bodies” located within China may be considered PRC resident enterprises and therefore subject to EIT at
the rate of 25% on their worldwide income. The Implementing Rules of the EIT Law further defines the term “de facto management
body” as the management body that exercises substantial and overall management and control over the business, personnel,
accounts and properties of an enterprise.
In
April 2009, the SAT issued the Notice Regarding the Determination of Chinese-Controlled Overseas Incorporated Enterprises as PRC
Tax Resident Enterprises on the Basis of De Facto Management Bodies, known as Circular 82, which provides certain specific criteria
for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore
is deemed to be located in China. Although Circular 82 only applies to offshore enterprises controlled by PRC enterprises or PRC
enterprise groups, not offshore enterprises controlled by PRC individuals or foreigners, the criteria set forth in the circular
may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining
the tax resident status of all offshore enterprises.
According
to Circular 82, a Chinese-controlled enterprise which is incorporated offshore will be regarded as a PRC tax resident by virtue
of having its “de facto management body” in China and will be subject to EIT on its global income only if all of the
following conditions are satisfied:
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the primary location
of the day-to-day operational management and the places where they perform their duties are in the PRC;
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decisions relating
to the enterprise’s financial and human resources matters are made or are subject to the approval of organizations or
personnel in the PRC;
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the enterprise’s
primary assets, accounting books and records, company seals and board and shareholders’ resolutions are located or maintained
in the PRC; and
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50% or more of voting
board members or senior executives habitually reside in the PRC.
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The
Administrative Measures for Enterprise Income Tax of Chinese-Controlled Overseas Incorporated Resident Enterprises (Trial Version),
or Bulletin 45, further clarifies certain issues related to the determination of tax resident status. Bulletin 45 also specifies
that when provided with a resident Chinese-controlled, offshore-incorporated enterprise’s copy of its recognition of residential
status, a payer does not need to withhold a 10% income tax when paying certain PRC-source income, such as dividends, interest
and royalties to such Chinese-controlled offshore-incorporated enterprise.
We
believe that our Cayman Islands holding company, Ebang International Holdings Inc., is not a PRC resident enterprise for PRC tax
purposes. Ebang International Holdings Inc. is a company incorporated outside China. As a holding company, its key assets are
its ownership interests in its subsidiaries, and its key assets are located, and its records (including the resolutions of its
board of directors and the resolutions of its shareholders) are maintained, outside China. As such, we do not believe that our
company meets all of the conditions above or is a PRC resident enterprise for PRC tax purposes. For the same reasons, we believe
our other entities outside China are not PRC resident enterprises either. However, the tax resident status of an enterprise is
subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de
facto management body.” There can be no assurance that the PRC government will ultimately take a view that is consistent
with our position and there is a risk that the PRC tax authorities may deem our company as a PRC resident enterprise since a substantial
majority of the members of our management team are located in China, in which case we would be subject to EIT at the rate of 25%
on worldwide income. If the PRC tax authorities determine that our Cayman Islands holding company is a “resident enterprise”
for EIT purposes, a number of unfavorable PRC tax consequences could follow.
One
example is a 10% withholding tax would be imposed on dividends we pay to our non-PRC enterprise shareholders and with respect
to gains derived by our non-PRC enterprise shareholders from transferring our shares. It is unclear whether, if we are considered
a PRC resident enterprise, holders of our shares would be able to claim the benefit of income tax treaties or agreements entered
into between China and other countries or areas.
According
to the Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises,
or SAT Public Notice 7, which was promulgated by the SAT and became effective on February 3, 2015, if a non-resident enterprise
transfers the equity interests of a PRC resident enterprise indirectly by transfer of the equity interests of an offshore holding
company (other than a purchase and sale of shares issued by a PRC resident enterprise in the public securities market) without
a reasonable commercial purpose, PRC tax authorities have the power to reassess the nature of the transaction and the indirect
equity transfer may be treated as a direct transfer. As a result, the gain derived from such transfer, which means the equity
transfer price less the cost of equity, will be subject to PRC withholding tax at a rate of up to 10%.
Under
the terms of SAT Public Notice 7, a transfer which meets all of the following circumstances shall be directly deemed as having
no reasonable commercial purposes if:
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over 75% of the
value of the equity interests of the offshore holding company are directly or indirectly derived from PRC taxable properties;
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at any time during
the year before the indirect transfer, over 90% of the total properties of the offshore holding company are investments within
PRC territories, or in the year before the indirect transfer, over 90% of the offshore holding company’s revenue is
directly or indirectly derived from PRC territories;
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the function performed
and risks assumed by the offshore holding company are insufficient to substantiate its corporate existence; or
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the foreign income
tax imposed on the indirect transfer is lower than the PRC tax imposed on the direct transfer of the PRC taxable properties.
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On
October 17, 2017, the SAT issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding
of Non-resident Enterprises Income Tax at Source, or SAT Bulletin 37, which took effect on December 1, 2017. SAT Bulletin
37 purports to provide further clarifications by setting forth the definitions of equity transfer income and tax basis, the foreign
exchange rate to be used in the calculation of the withholding amount and the date on which the withholding obligation arises.
Specifically,
SAT Bulletin 37 provides that where the transfer income subject to withholding at source is derived by a non-PRC resident enterprise
in instalments, the instalments may first be treated as recovery of costs of previous investments. Upon recovery of all costs,
the tax amount to be withheld must then be computed and withheld.
There
is uncertainty as to the application of SAT Public Notice 7 and SAT Bulletin 37. SAT Public Notice 7 and SAT Bulletin 37 may be
determined by the PRC tax authorities to be applicable to transfers of our shares that involve non-resident investors, if any
of such transactions were determined by the tax authorities to lack a reasonable commercial purpose.
As
a result, we and our non-resident investors in such transactions may become at risk of being taxed under SAT Public Notice 7 and
SAT Bulletin 37, and we may be required to comply with SAT Public Notice 7 and SAT Bulletin 37 or to establish that we should
not be taxed under the general anti-avoidance rule of the EIT Law. This process may be costly and have a material adverse effect
on our financial condition and results of operations.
Value-added
Tax
Under
the Circular on Comprehensively Promoting the Pilot Program of the Collection of Value-added Tax to Replace Business Tax, or Circular
36, which was promulgated by the Ministry of Finance and the SAT on March 23, 2016 and became effective on May 1, 2016, entities
and individuals engaging in the sale of services, intangible assets or fixed assets within the territory of the PRC are required
to pay value added tax, or VAT, instead of business tax.
According
to the Circular 36, our PRC subsidiaries and consolidated affiliated entity are subject to VAT, at a rate of 6% to 17% on proceeds
received from customers and are entitled to a refund for VAT already paid or borne on the goods purchased by it and utilized in
the production of goods or provisions of services that have generated the gross sales proceeds.
According
to the Circular of the Ministry of Finance and the SAT on Adjusting Value-added Tax Rates, where a taxpayer engages in a taxable
sales activity for the value-added tax purpose or imports goods, the previous applicable 17% tax rates are lowered to 16%.
According
to the Circular on Policies to Deepen Value-added Tax Reform, where a taxpayer engages in a taxable sales activity for the value-added
tax purpose or imports goods, the previous applicable 16% and 10% tax rates are lowered to 13% and 9% respectively.
Material
U.S. Federal Income Tax Considerations
The following discussion is
a summary of material U.S. federal income tax considerations relating to the ownership and disposition of our Class A ordinary shares
and warrants by a U.S. Holder, as defined below, that acquires the Class A ordinary shares and warrants and holds the Class A ordinary
shares and warrants as “capital assets” (generally, property held for investment) under Section 1221 of the United States
Internal Revenue Code of 1986, as amended, or the Code. This discussion is based upon existing U.S. federal income tax law as of the date
of this annual report, which is subject to differing interpretations or change, possibly with retroactive effect. No ruling has been sought
from the Internal Revenue Service, or the IRS, with respect to any U.S. federal income tax consequences described below, and there can
be no assurance that the IRS or a court will not take a contrary position. This discussion does not address all aspects of U.S. federal
income taxation that may be important to particular investors in light of their individual circumstances, including investors subject
to special tax rules (such as, for example, financial institutions, insurance companies, regulated investment companies, real estate investment
trusts, broker-dealers, traders in securities that elect mark-to-market treatment, partnerships or other pass-through entities for U.S.
federal income tax purposes and their partners or investors, tax-exempt organizations (including private foundations), investors who are
not U.S. Holders, investors that own (directly, indirectly, or constructively) ordinary shares representing 10% or more of our stock (by
vote or by value), investors that hold their Class A ordinary shares and/or related warrants as part of a straddle, hedge, conversion,
constructive sale or other integrated transaction, or investors that have a functional currency other than the U.S. dollar, all of whom
may be subject to tax rules that differ significantly from those summarized below. In addition, this discussion does not address any U.S.
federal estate, gift or other non-income tax considerations, state, local, or non-U.S. tax considerations, the alternative minimum tax,
or the Medicare contribution tax on net investment income. Each potential investor is urged to consult its tax advisor regarding the U.S.
federal, state, local and non-U.S. income and other tax considerations of an investment in the Class A ordinary shares and related warrants.
General
For
purposes of this discussion, a “U.S. Holder” is a beneficial owner of our Class A ordinary shares and related warrants
that is, for U.S. federal income tax purposes, (1) an individual who is a citizen or resident of the United States, (2) a corporation
(or other entity or arrangement treated as a corporation for U.S. federal income tax purposes) created in, or organized under
the laws of, the United States or any state thereof or the District of Columbia, (3) an estate the income of which is includible
in gross income for U.S. federal income tax purposes regardless of its source, or (4) a trust (a) the administration of which
is subject to the primary supervision of a U.S. court and which has one or more United States persons (within the meaning of Section
7701(a)(30) of the Code) who have the authority to control all substantial decisions of the trust or (b) that has otherwise elected
to be treated as a United States person under the Code.
If a partnership (or other
entity or arrangement treated as a partnership for U.S. federal income tax purposes) is a beneficial owner of our Class A ordinary shares
and warrants, the tax treatment of a partner in the partnership will depend upon the status of the partner and the activities of the partnership.
Partnerships and partners of a partnership holding our Class A ordinary shares and related warrants are urged to consult their tax advisors
regarding an investment in our Class A ordinary shares and related warrants.
Passive
Foreign Investment Company Considerations
A
non-U.S. corporation, such as our company, will be classified as a “passive foreign investment company,” or PFIC,
for U.S. federal income tax purposes for any taxable year if either (1) 75% or more of its gross income for such year consists
of certain types of “passive” income, or the “income test” or (2) 50% or more of the value of its assets
(generally based on an average of the quarterly values of the assets) during such year is attributable to assets that produce
or are held for the production of passive income, or the “asset test”. For this purpose, cash and assets readily convertible
into cash are categorized as passive assets and the company’s unbooked intangibles associated with active business activities
may generally be classified as active assets. Passive income generally includes, among other things, dividends, interest, rents,
royalties, and gains from the disposition of passive assets. We will be treated as owning our proportionate share of the assets
and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, more than
25% (by value) of the stock.
While we do not expect to
be or become a PFIC in the current or foreseeable taxable years, no assurance can be given in this regard because the determination of
whether we will be or become a PFIC is a factual determination made annually that will depend, in part, upon the composition of our income
and assets. Furthermore, the composition of our income and assets may also be affected by how, and how quickly, we use our liquid assets
and the cash raised in our initial public offering. Under circumstances where our revenue from activities that produce passive income
significantly increases relative to our revenue from activities that produce non-passive income, or where we determine not to deploy significant
amounts of cash for active purposes, our risk of becoming a PFIC may substantially increase. In addition, because there are uncertainties
in the application of the relevant rules, it is possible that the Internal Revenue Service may challenge our classification of certain
income and assets as non-passive or our valuation of our tangible and intangible assets, each of which may result in our becoming a PFIC
for the current or subsequent taxable years. If we were classified as a PFIC for any year during which a U.S. Holder held our ordinary
shares, we generally would continue to be treated as a PFIC for all succeeding years during which such U.S. Holder held our ordinary shares
even if we cease to be a PFIC in subsequent years, unless certain elections are made.
The
discussion herein under “Dividends” is written on the basis that we will not be or become classified as a PFIC for
U.S. federal income tax purposes. If we are treated as a PFIC, the U.S. federal income tax considerations that apply generally
are discussed under “Passive Foreign Investment Company Rules.”
Dividends
Subject to the PFIC rules
described below, any distributions (including constructive distributions the amount of any PRC tax withheld) paid on the Class A ordinary
shares out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles, will generally
be includible in the gross income of a U.S. Holder as dividend income on the day actually or constructively received by the U.S. Holder.
Because we do not intend to determine our earnings and profits under U.S. federal income tax principles, any distribution will generally
be treated as a “dividend” for U.S. federal income tax purposes. Under current law, a non-corporate recipient of dividend
income will generally be subject to tax on dividend income from a “qualified foreign corporation” at the lower rates applicable
to “qualified dividend income” rather than the marginal tax rates generally applicable to ordinary income, provided that certain
holding period and other requirements are met.
A non-U.S. corporation (other
than a corporation that is classified as a PFIC for the taxable year in which the dividend is paid or the preceding taxable year) will
generally be considered to be a qualified foreign corporation (1) if it is eligible for the benefits of a comprehensive income tax treaty
with the United States that the Secretary of Treasury of the United States determines is satisfactory for purposes of this provision and
that includes an exchange of information program, or (2) with respect to any dividend it pays on stock that is readily tradable on an
established securities market in the United States. Our Class A ordinary shares are listed on the Nasdaq Global Select Market. We believe,
but cannot assure you, that Class A ordinary shares will continue to be considered readily tradable on an established securities market
in the United States and that we will be a qualified foreign corporation with respect to dividends paid on the Class A ordinary shares.
However, there can be no assurance that the Class A ordinary shares will continue to be considered readily tradable on an established
securities market in later years. In the event we are deemed to be a PRC resident enterprise under the Enterprise Income Tax Law (see
“—PRC Taxation”), we may be eligible for the benefits of the Agreement Between the Government of the United States of
America and the Government of the People’s Republic of China for the Avoidance of Double Taxation and the Prevention of Tax Evasion
with Respect to Taxes on Income, or the United States-PRC income tax treaty (that the Secretary of the Treasury of the United States has
determined is satisfactory for this purpose), in which case we would be treated as a qualified foreign corporation with respect to dividends
paid on our Class A ordinary shares. U.S. Holders are urged to consult their tax advisors regarding the availability of the reduced tax
rate on dividends in their particular circumstances. Dividends received on the Class A ordinary shares will not be eligible for the dividends
received deduction allowed to qualifying corporations under the Code.
For U.S. foreign tax credit
purposes, dividends paid on the Class A ordinary shares will generally be treated as income from foreign sources and will generally constitute
passive category income. If we are deemed to be a PRC resident enterprise under the Enterprise Income Tax Law, a U.S. Holder may be subject
to PRC withholding taxes on dividends paid, if any, on the Class A ordinary shares. A U.S. Holder may be eligible, subject to complex
limitations, to claim a foreign tax credit in respect of any foreign withholding taxes imposed on dividends received on the Class A ordinary
shares. A U.S. Holder who does not elect to claim a foreign tax credit for foreign tax withheld may instead claim a deduction for U.S.
federal income tax purposes in respect of such withholding, but only for a year in which such holder elects to do so for all creditable
foreign income taxes. The rules governing the foreign tax credit are complex. U.S. Holders are urged to consult their tax advisors regarding
the availability of the foreign tax credit under their particular circumstances.
Sale or Other Disposition of Ordinary Shares
Subject to the PFIC rules
discussed below, a U.S. Holder will generally recognize capital gain or loss, if any, upon the sale or other disposition of Class A ordinary
shares and warrants in an amount equal to the difference between the amount realized upon the disposition and the holder’s adjusted
tax basis in such Class A ordinary shares. Any capital gain or loss will be long-term capital gain or loss if the Class A ordinary shares
have been held for more than one year and will generally be U.S. source gain or loss for U.S. foreign tax credit purposes. Long-term capital
gains of non-corporate U.S. Holders are currently eligible for reduced rates of taxation. If we are treated as a PRC resident enterprise
under the Enterprise Income Tax Law, and gain from the disposition of the ordinary shares is subject to tax in the PRC (see “—PRC
Taxation”), such gain may be treated as PRC source gain for foreign tax credit purposes under the United States-PRC income tax treaty.
The deductibility of a capital loss may be subject to limitations. U.S. Holders are urged to consult their tax advisors regarding the
tax consequences if a foreign tax is imposed on a disposition of the Class A ordinary shares, including the availability of the foreign
tax credit under their particular circumstances.
Passive
Foreign Investment Company Rules
If
we are classified as a PFIC for any taxable year during which a U.S. Holder holds the Class A ordinary shares or warrants, unless
the U.S. Holder makes one of certain elections (as described below), the U.S. Holder will, except as discussed below, be subject
to special tax rules that have a penalizing effect, regardless of whether we remain a PFIC in subsequent taxable years, on (1)
any excess distribution that we make to the U.S. Holder (which generally means any distribution paid during a taxable year to
a U.S. Holder that is greater than 125% of the average annual distributions paid in the three preceding taxable years or, if shorter,
the U.S. Holder’s holding period for the ordinary shares or warrants), and (2) any gain realized on the sale or other disposition,
including, under certain circumstances, a pledge, of Class A ordinary shares or warrants. Under the PFIC rules:
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the excess distribution
and/or gain will be allocated ratably over the U.S. Holder’s holding period for the Class A ordinary shares or warrants;
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the amount of the
excess distribution or gain allocated to the taxable year of distribution or gain and to any taxable years in the U.S. Holder’s
holding period prior to the first taxable year in which we are classified as a PFIC (each such taxable year, a pre-PFIC year)
will be taxable as ordinary income;
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the amount of the
excess distribution or gain allocated to each prior taxable year, other than a pre-PFIC year, will be subject to tax at the
highest tax rate in effect applicable to the individuals or corporations, as appropriate, for that year, and will be increased
by an additional tax equal to interest on the resulting tax deemed deferred with respect to each such year.
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If we are a PFIC for any
taxable year during which a U.S. Holder holds the Class A ordinary shares or warrants and any of our non-U.S. subsidiaries or other corporate
entities in which we own equity interests is also a PFIC, such U.S. Holder would be treated as owning a proportionate amount (by value)
of the shares of the lower-tier PFIC for purposes of the application of these rules. Each U.S. Holder is advised to consult its tax advisors
regarding the application of the PFIC rules to any of our lower-tier PFICs.
If we are a PFIC for any taxable
year during which a U.S. Holder holds the Class A ordinary shares or warrants, we will continue to be treated as a PFIC with respect to
such U.S. Holder for all succeeding taxable years during which the U.S. Holder holds the Class A ordinary shares or warrants, unless we
were to cease to be a PFIC and the U.S. Holder makes a “deemed sale” election with respect to the Class A ordinary shares
or warrants. If such election is made, the U.S. Holder will be deemed to have sold its ordinary shares or warrants at their fair market
value and any gain from such deemed sale would be subject to the rules described in the preceding two paragraphs. After the deemed sale
election, so long as we do not become a PFIC in a subsequent taxable year, the Class A ordinary shares or warrants with respect to which
such election was made will not be treated as shares in a PFIC and, as a result, the U.S. Holder will not be subject to the rules described
above with respect to any “excess distribution” the U.S. Holder receives from us or any gain from an actual sale or other
disposition of the Class A ordinary shares or warrants. Each U.S. Holder is strongly urged to consult its tax advisors as to the possibility
and consequences of making a deemed sale election if we are and then cease to be a PFIC and such an election becomes available to the
U.S. Holder.
As an alternative to the foregoing
rules, a U.S. Holder of “marketable stock” in a PFIC may make a mark-to-market election with respect to the Class A ordinary
shares (but not the warrants), provided that the Class A ordinary shares are “regularly traded” (as specially defined in the
applicable United States Treasury Regulations) on the Nasdaq Global Select Market, which is a qualified exchange or other market for these
purposes. We expect that our Class A ordinary shares will be treated as marketable stock upon their listing on the Nasdaq Global Select
Market, but no assurances can be given in this regard. If a mark-to-market election is made, the U.S. Holder will generally (1) include
as ordinary income for each taxable year that we are a PFIC the excess, if any, of the fair market value of Class A ordinary shares held
at the end of the taxable year over the U.S. Holder’s adjusted tax basis in such Class A ordinary shares and (2) deduct as an ordinary
loss the excess, if any, of the U.S. Holder’s adjusted tax basis in the Class A ordinary shares over the fair market value of such
Class A ordinary shares held at the end of the taxable year, but only to the extent of the net amount previously included in income as
a result of the mark-to-market election. The U.S. Holder’s adjusted tax basis in the Class A ordinary shares would be adjusted to
reflect any income or loss resulting from the mark-to-market election. If a U.S. Holder makes an effective mark-to-market election in
any year that we are a PFIC, any gain recognized upon the sale or other disposition of the Class A ordinary shares will be treated as
ordinary income and any loss will be treated as ordinary loss, but only to the extent of the net amount previously included in income
as a result of the mark-to-market election.
If
a U.S. Holder makes a mark-to-market election in respect of a corporation classified as a PFIC and such corporation ceases to
be classified as a PFIC, the U.S. Holder will not be required to take into account the mark-to-market gain or loss described above
during any period that such corporation is not classified as a PFIC.
Because
a mark-to-market election cannot be made for any lower-tier PFICs that we may own, a U.S. Holder who makes a mark-to-market election
with respect to the Class A ordinary shares may continue to be subject to the general PFIC rules with respect to such U.S. Holder’s
indirect interest in any of our non-U.S. subsidiaries or other corporate entities in which we own equity interests that is classified
as a PFIC.
We
do not intend to provide information necessary for U.S. Holders to make qualified electing fund elections, which, if available,
would result in tax treatment different from the general tax treatment for PFICs described above.
As
discussed above under “Dividends,” dividends that we pay on the Class A ordinary shares will not be eligible for the
reduced tax rate that applies to qualified dividend income if we are classified as a PFIC for the taxable year in which the dividend
is paid or the preceding taxable year. In addition, if a U.S. Holder owns the Class A ordinary shares or warrants during any taxable
year that we are a PFIC, the holder must file an annual information return with the IRS. Each U.S. Holder is urged to consult
its tax advisor concerning the U.S. federal income tax consequences of purchasing, holding, and disposing Class A ordinary shares
or warrants if we are or become a PFIC, including the possibility of making a mark-to-market election and the unavailability of
the qualified electing fund election.
Information
Reporting and Backup Withholding
Certain
U.S. Holders are required to report information to the IRS relating to an interest in “specified foreign financial assets”
(as defined in the Code), including shares and warrants issued by a non-United States corporation, for any year in which the aggregate
value of all specified foreign financial assets exceeds $50,000 (or a higher dollar amount prescribed by the IRS), subject to
certain exceptions (including an exception for shares held in custodial accounts maintained with a U.S. financial institution).
These rules also impose penalties if a U.S. Holder is required to submit such information to the IRS and fails to do so.
In
addition, U.S. Holders may be subject to information reporting to the IRS and backup withholding with respect to dividends on
and proceeds from the sale or other disposition of the Class A ordinary shares or warrants. Information reporting will generally
apply to payments of dividends on, and to proceeds from the sale or other disposition of, Class A ordinary shares or warrants
by a paying agent within the United States to a U.S. Holder, other than U.S. Holders that are exempt from information reporting
and properly certify their exemption. A paying agent within the United States will be required to withhold at the applicable statutory
rate, currently 24%, in respect of any payments of dividends on, and the proceeds from the disposition of, Class A ordinary shares
or warrants within the United States to a U.S. Holder (other than U.S. Holders that are exempt from backup withholding and properly
certify their exemption) if the holder fails to furnish its correct taxpayer identification number or otherwise fails to comply
with applicable backup withholding requirements. U.S. Holders who are required to establish their exempt status generally must
provide a properly completed IRS Form W-9.
Backup withholding is not
an additional tax. Amounts withheld as backup withholding may be credited against a U.S. Holder’s U.S. federal income tax liability.
A U.S. Holder generally may obtain a refund of any amounts withheld under the backup withholding rules by filing the appropriate claim
for refund with the IRS in a timely manner and furnishing any required information. Each U.S. Holder is advised to consult with its tax
advisor regarding the application of the United States information reporting rules to their circumstances.
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F.
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Dividends
and paying agents
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Not
applicable.
Not
applicable.
We
are subject to the informational requirements of the Exchange Act. Accordingly, we are required to file reports and other information
with the SEC, including annual reports on Form 20-F and reports on Form 6-K. The SEC maintains an Internet website that
contains reports and other information about issuers, like us, that file electronically with the SEC. The address of that website
is www.sec.gov. As a foreign private issuer, we are exempt from the rules under the Exchange
Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders
are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
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I.
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Subsidiary
information
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Not
applicable.