Unraveling the mystery of Zhongying Internet and Yibang's lawsuit, 100,000 mining machine transactions are in a Rashomon

Source: Securities Times, original title: "Revelation in court! The mining machine giant fell out with this A-share company, and it actually led to the "Red Wanted" boss"

Author: Zang Xiaosong Ren Xiaoran

At the end of 2019, the listed company Zhongying Internet (002464) and the global mining machine giant Zhejiang Yibang jointly staged a blockchain "mining machine transaction storm": around whether the delivery of 100,000 mining machines was completed as agreed, the two parties went from being "good business partners" to falling into a "mutual tearing" mystery. For details, please see the previous report of Securities Times e Company "Weird! The layout of blockchain triggered a "delivery storm", and 35,000 devices disappeared strangely? The buyer has reported the case! The latest response is here".

Securities Times e-company reporters discovered through long-term tracking of transactions and in-depth investigations that behind this transaction involving more than 500 million yuan and 100,000 mining machines, the business logic is full of loopholes, the investment income cannot be effectively covered, and the customer background is also full of doubts. Zhongying Internet's subsidiary Cailiang Technology even stated in court that the transaction between the two parties was to cooperate with Zhejiang Yibang's listing, and pointed out that the final buyer was Li Yonggang, the actual controller of Yindou.com.

The interest chain behind the entire transaction is intricate and intricate, spanning the A-share and H-share capital markets, the mining machine and coin mining markets, and even Internet finance. More facts remain to be disclosed truthfully by both parties.

Transactions being inquired about

The "cloud computing servers" mentioned repeatedly in Zhongying Internet's announcements are more commonly known as "mining machines" or "mining machines". In the past few years, virtual currencies such as Bitcoin have been traded wildly, and the mining machine industry has risen accordingly. Some listed companies have also participated in it, and Zhongying Internet is one of them. However, it is worth noting that Zhongying Internet's early disclosures were quite low-key. Under the continuous inquiries of the Shenzhen Stock Exchange, it gradually disclosed the mining machine transaction process like "squeezing toothpaste".

In response to the first quarter report of 2018, the Shenzhen Stock Exchange sent a letter of inquiry, pointing out that the company's prepaid accounts balance at the end of the first quarter of 2018 increased by 232 million yuan month-on-month. Zhongying Internet then disclosed: its subsidiary Cailiang Technology signed a cloud computing server procurement contract with Zhejiang Yibang in March 2018. According to the contract, Cailiang Technology prepaid a total of 214.8 million yuan in installments, with a payment period of three to six months, and no longer than nine months.

Under the Shenzhen Stock Exchange's repeated questioning, Zhongying Internet further disclosed the company's involvement in the mining machine business, showing that Cailiang Technology began to deploy in areas such as mine construction in the second half of 2017, and established a "good business partner" relationship with Zhejiang Yibang; Cailiang Technology and its end customer VAST DAY INDUSTRY TRADE COMPANY PTE.LIMITED (hereinafter referred to as "VAST Company") signed the "Contract for Procurement of Goods" in March 2018. VAST customer entrusted Cailiang Technology to purchase cloud computing servers (product model is Yibit E9+, commonly known as "mining machines") and related accessories and facilities in China, with a quantity of 100,000 sets and a total of 504 million yuan; Cailiang Technology is fully responsible for all domestic procurement stages, and Cailiang Technology only earns a fixed proportion of service fees.

At the same time, Cailiang Technology found Xiamen Yakxun Electronic Technology Co., Ltd. (hereinafter referred to as "Xiamen Yakxun") as the exporter for this procurement business and signed the "Procurement Contract" and related supplementary agreements: Cailiang Technology will add a price no higher than 7.50% to the original price of the entrusted goods and then resell them to Xiamen Yakxun Electronic Technology Co., Ltd. (hereinafter referred to as "Xiamen Yakxun"); Xiamen Yakxun pays the purchase price to Cailiang Technology, and the marked-up portion will be used as the agency service fee that Xiamen Yakxun should pay to Cailiang Technology.

In addition, the US electricity service provider 3G Venture LLC has reached a cooperation intention with Cailiang Technology to provide venues and electricity services to Cailiang Technology's customers, and also serve as an importer for VAST to purchase cloud computing servers in China.

Specifically, Mobcolor Technologies USA LLC, a subsidiary of Mobcolor Technology, signed a "Cloud Computing Technology Service Contract" with VAST and 3G Venture LLC respectively: VAST leased about 100,000 square feet of space from Mobcolor USA for digital currency (hash algorithm) computing services. The site includes a power supply capacity of up to 90 megawatts, with a lease term of 3 years. According to forecasts, this transaction will increase the total profit of the listed company by RMB 6 million to RMB 15 million in 2018; it is expected to increase the total profit by RMB 25 million to RMB 60 million in 2019 and 2020.

Throughout the transaction, Cailiang Technology acted as a "matchmaker". During the entire financial accounting process, all parties agreed to first pay a deposit of 80% of the purchase price to Gu Hongliang, the legal representative of Cailiang Technology. After all commercial negotiations and pre-project work were completed, Gu Hongliang would provide the deposit to Cailiang Technology for project operations.

Zhongying Internet said that the above transactions did not constitute related-party transactions, the transaction pricing was fair, there was no interest transfer involved, the amount involved in a single transaction did not reach 50% of the total net audited revenue in 2017, and the relevant transactions did not need to comply with the board of directors' review procedures and information disclosure obligations.

Regarding the reasons and rationality of the company's advance payment for procurement, Zhongying Internet said: Because this business involves many links such as overseas operating companies, imports and exports in the early stage of development, and the company's lack of management experience, it did not allow customers to directly remit money to the company's account. "If there are any problems during the implementation of the project, the repayment can be made directly to the customer to avoid letting the listed company bear uncertain factors and risks as much as possible."

When Securities Times e-company reporters consulted mining machine manufacturers and electronic supply chain logistics companies about this, they all expressed confusion about this "lengthy" process. After all, international logistics is now well developed, and overseas exports can be done from customer to customer in one step, and the "public to private" account transfer is also different from conventional operations. The 7.5% agency fee rate is basically within a reasonable range in the industry, but the 80% deposit transfer is somewhat unusual. After all, with the sharp drop in Bitcoin prices in 2018, mining machine market transactions have gradually cooled down.

Mining machine transactions that cannot be accounted for

e Company reporter's investigation found that as far as the mining machine models sold this time are concerned, the Ebit E9+ mining machine is no longer a best-selling model in 2018; even the E9+ mining machine has been eliminated by the mainstream mining market in the second half of 2018.

Several merchants in Huaqiangbei told reporters that due to the market shortage in 2017, the price of Bitmain's Antminer was hyped up to 30,000 yuan at its peak, and the price of Ebit mining machines was hyped up to more than 10,000 yuan. However, as the price of coins fell, the mining machine market changed rapidly. Ebit stopped shipping E9+ in the second quarter of 2018. In the second half of 2018, Ebit E9+ on the market was mainly traded as second-hand mining machines, with a quoted price of 500 to 600 yuan per unit, and there was very little stock. Customers mainly reported that there were problems such as slow return process and high power consumption.

Zhejiang Yibang's prospectus disclosed that the E9+ mining machine was launched in February 2017 and is an upgraded version of the Ebit E9. Its hash rate is 9TH/S. During 2017, the sales volume of E9+ was about 140,000 units, with an average selling price of 5,895 yuan. In the first half of 2018, the price dropped to 4,350 yuan. When the reporter asked Ebit customer service about the E9+, the other party said that the model was no longer available and recommended other models such as E10.

Ebang Mining Machine Sales Disclosure

Corresponding to the contract between Cailiang Technology and Ebang, the price of 100,000 E9+ mining machines signed in March 2018 was as high as 5,040 yuan per unit, which was not much different from the official price in 2017 when the products were in extremely short supply; it was even higher than the official unit price disclosed in the 2018 prospectus.

An important factor in determining mining revenue is electricity cost. Therefore, when the price of coins drops, miners not only look for the most cost-effective mining machine models, but also look around the world for the most cost-effective electricity supply.

In response to inquiries, Zhongying Internet pointed out that its subsidiary American Cailiang, as a service provider, signed a contract with 3G Company of the United States for site leasing and power equipment leasing, which stipulated that the price would be calculated based on electricity charges, at 5.5 cents per kilowatt-hour. At the same time, it signed a site leasing plus equipment operation and maintenance service contract with VAST, and American Cailiang was responsible for the technical service agreement for the daily operation and maintenance and management of VAST's mining machines, with a price of 7.5 cents per kilowatt-hour, equivalent to about RMB 0.5 per kilowatt-hour.

As for choosing the United States, Zhongying Internet Support can guarantee stable operation and maintenance services in the United States with an overall power outage of no more than 100 hours per year; compared with the domestic electricity price of 0.5 to 0.6 yuan per kWh at that time, and the state of hard-to-find machine positions, the mining farms provided by American Cailiang are very competitive in terms of environment and price. Among them, American Cailiang is responsible for the management and daily operations of the site, earning a profit of 2 cents per kWh of electricity price difference.

But the problem is that referring to the basic parameters of the E9+ mining machine, it is impossible to recover the cost at 0.5-0.6 yuan/kWh electricity fee. According to the mining income of mainstream currencies calculated by Biyin, if the models including Yibit E9+ are charged at 0.5 yuan/kWh electricity fee, the net profit loss will exceed 8 yuan per day; 0.6 yuan/kWh corresponds to a daily loss of more than 12 yuan; even at the lowest domestic electricity price of 0.33 yuan/kWh, the daily loss will still exceed 2 yuan.

Yibit E9+-9T mining machine yield Source: CoinIn

If this transaction was completed after due diligence by both the buyer and the seller, whether in terms of the choice of mining machine model or power supply, it violated the objective business logic of the mining industry from the beginning of the signing of the contract.

“Living Lei Feng” Supply Chain

According to the reporter's understanding from the Shenzhen mining machine hosting company, the normal domestic hosting electricity fee was about 0.38-0.4 yuan/kWh in 2018. When the price of Bitcoin reached 120,000 at the end of 2017, the electricity price also rose to 0.5-0.6 yuan/kWh; many miners choose to go overseas, but developed countries are not the first choice, but mainly Central Asia, Southeast Asia and other countries with surplus electricity. In addition, the reporter learned from the lawyer responsible for international trade litigation that in 2018, due to the decline in the price of coins, there were many lawsuits against mining machine importers for breach of contract.

It took Zhongying Internet a long time to react to this sudden market situation. On April 27, 2019, it announced the termination of the Cloud Computing Technology Service Contract signed between American Cailiang, VAST and 3G. By then, the price of Bitcoin had rebounded.

Bitcoin price source: coindesk

The listed company pointed out that VAST's customers originally hoped to wait for the price of Bitcoin to recover before starting up the system. Although the price of Bitcoin had recovered to more than US$5,000 by April 2019, the supercomputer server it purchased was outdated, had low computing power and high power consumption, and was still unable to make a profit. Therefore, VAST has not started up the system to date.

Considering that VAST had not notified American Color to start operation, after many communications and coordination, 3G agreed to waive the US$14.4 million in equipment rental fees and related listing fees that American Color paid from the end of August 2018 to April 2019 in accordance with the contract, and American Color agreed to transfer the US$16 million receivables from VAST directly to 3G. This cross-border transaction across the year officially ended.

In other words, 3G has generously borne the loss of $30.4 million in hosting fees and the debt burden, totaling more than 200 million yuan. The listed company stated that the relevant "Cloud Computing Technology Service Contract" did not generate economic benefits in 2018, nor did it cause losses to Cailiang Technology; the termination of the contract will not affect the company's business operations and development strategies in 2019 and in the future.

Combined with the subsequent lawsuits and reporting materials between Zhejiang Yibang and Cailiang Technology, Securities Times e-company reporters noticed that Yibang International directly denied this end-customer relationship, stating that Zhejiang Yibang and VAST had never met and had no business dealings.

The reporter further checked the overseas business registration information website and found that the VAST customer who spent 100 million yuan was registered in Singapore. It was a trading company with no main products. The registration time was March 21, 2018, which was the actual signing date of the contract for 100,000 mining machines disclosed by Zhejiang Yibang.

End customer VAST business registration information

What is even more bizarre is that the registered address of the branch of 3G Company, which Zhongying Internet has always claimed to have no affiliation with, is at the same location as the American branch of MOBCOLOR TECHNOLOGIES, namely 1615 West Garden of the Gods Road, Colorado Springs, Colorado, CO 80907, US. This is also the location where the listed company disclosed the hosting of the mining machines.

The reporter checked the overseas Bitcoin industry reports from June last year, which showed that 3G spent 13 million US dollars to purchase the abandoned factory originally belonging to Intel for mining; the broker said that 3G was mainly interested in the power supply here and asked the local power company to increase the power supply here; the head of the local Chamber of Commerce said that the local area does not actively recruit mining companies, but also considers increasing local employment opportunities to show support.

In addition, the reporter also secretly visited the export agent Xiamen Yakxun in 2018, but the name displayed on the doorplate was "Beijing Olympic Technology". The relevant receptionist said that the company was also Xiamen Yakxun and asked "how big an export can be connected"; when the reporter called the registered phone number again, the other party no longer responded.

Overseas export records and registration information show that 3G is Xiamen Yakxun's largest customer, accounting for about half of the total; in 2018, Xiamen Yakxun's total assets soared from less than 500,000 yuan in the previous three years to 343 million yuan, and its total liabilities reached 339 million yuan; corresponding to the financial statements of listed companies, Xiamen Yakxun was still ranked as the largest debtor in the first half of 2018, with accounts receivable as high as 53.83 million yuan, but it no longer appeared after the third quarter.

Cailiang Technology revealed: The purchase is to cooperate with Zhejiang Yibang's listing

As this fraught transaction progressed into mutual litigation, the inside story surrounding whether the 3.5 mining machines were delivered in full became more apparent.

On November 26, the Hangzhou Intermediate People's Court opened a hearing on the sales contract dispute between Zhejiang Yibang and Cailiang Technology. A Securities Times e-company reporter watched the trial through the Zhejiang Court's live trial website.

Cailiang Technology's attorney said in court that "whether a transaction exists should be based on objective and true evidence." Gu Hongliang, the legal representative of Cailiang Technology, and Zhang Hao, the director of Zhejiang Yibang and the legal representative of Yunnan Yibang, were classmates in the EMBA program of Beijing University of Posts and Telecommunications. "The two of them trusted each other very much. In order to cooperate with the other party (Zhejiang Yibang) in the listing of the transaction, they did some things that were inconsistent with the facts."

It is worth noting that Yibang’s plan to go public in Hong Kong in 2018 failed, and the latest news is that it plans to go public on the US stock market.

The court hearing of the contract dispute between Zhejiang Yibang and Cailiang Technology

Cailiang Technology's attorney specifically mentioned the recording of the conversation between Gu Hongliang and Zhang Hao. Gu Hongliang said in the conversation, "Last time you said you needed the statement urgently, so I called the finance department and they stamped it for you. After stamping it, you used it to sue us." Zhang Hao responded, "I told you last time that the statement would not be like that. I will explain it later." Cailiang Technology's attorney therefore believed that Zhang Hao's verbal promise on the statement would not be used as evidence for the lawsuit.

Zhejiang Yibang’s attorney stressed that there is sufficient evidence that 100,000 mining machines have been delivered. According to reports, the two parties have established three delivery groups to complete the delivery of 100,000 mining machines, shipping 5,000, 60,000, and 35,000 units respectively. The delivery method is: the driver designated by Cailiang Technology’s freight forwarder will pick up the goods at the factory cooperating with Zhejiang Yibang.

Cailiang Technology's attorney responded that they acknowledged that they had received 65,000 units, but Cailiang Technology had no involvement in the subsequent 35,000 units. "Hu Liang was not designated by Cailiang Technology, but was designated by Zhejiang Yibang to pick up the goods." The attorney said that the group for shipping 35,000 mining machines did not include the legal representative of Cailiang Technology (Gu Hongliang) in the group. "They did it on purpose and secretly shipped 35,000 units to a third party without telling Cailiang Technology.

"If you need us to pay, there is no reason not to invite new Cailiang people (to join the group)." Cailiang Technology's attorney emphasized that because Cailiang Technology did not receive 35,000 mining machines, Zhejiang Yibang had no way to confirm this part of the performance. "They need it for listing, so Yibang's Zhang Hao asked Gu Hongliang to pretend to pay us 10 million yuan and say how much money is owed. Pay 10 million first. In this way, when we go public, this matter can be explained, and we will not have nothing in our hands." Cailiang Technology's attorney said, "It is because of this trust that we stamped the statement later and did not conduct a strict review."

Regarding the issue of funds between Cailiang Technology and Zhejiang Yibang, the reporter of e Company called the securities department of Zhongying Internet on December 23, and the staff said that they would not accept interviews on this matter, and everything was subject to the investigation of the public security organs. When the reporter asked whether the large amount of impairment provision was related to this dispute, the other party said that it was because Cailiang Technology's performance did not meet expectations, and said that the two things should not be linked together.

Looking back at Zhejiang Yibang’s prospectus, it shows that the revenue from blockchain business has gradually increased, from 29.2 million yuan in 2015 to 925 million yuan in 2017, and the blockchain business revenue in the first half of 2018 was as high as 2.124 billion yuan; however, according to the Science and Technology Innovation Board prospectus of chip supplier VeriSilicon, since Yibang became one of the company’s top five customers in 2016, the corresponding sales amount in 2017 has dropped from 54.11 million yuan to 46.44 million yuan, and slightly increased to 46.77 million yuan in 2018. By the first half of 2019, it was no longer one of the top five customers.

In addition, Securities Times e-company reporter noticed that in addition to Zhongying Internet, Xinjiang Huatie Heng'an Construction Safety Technology Co., Ltd., a former wholly-owned subsidiary of Huatie Emergency, was also involved in a mining machine procurement dispute with Zhejiang Yibang, which also involved the reason that Zhejiang Yibang failed to supply sufficient goods.

Li Yonggang, the actual controller of Yindou.com, was accused of being the final purchaser

Securities Times e-company reporter noticed that in the conversation recording provided by Cailiang Technology, Gu Hongliang mentioned another key figure: Li Yonggang, the actual controller of the P2P platform "Yindou.com".

Yindou.com's official Weibo account shows that the website is an Internet financial comprehensive service platform under Beijing Dongfang Caiyun Financial Information Service Co., Ltd., and claims that "all Yindou.com user funds are deposited by Jiangxi Bank, and Yindou.com does not participate in the flow of funds during the transaction process."

However, Yindou.com did not make investors feel "at ease, assured and confident" as advertised: On July 18, 2018, Yindou.com published an announcement on its website, saying, "Since the actual controller of Yindou.com, Li Yonggang, has lost contact, the funds cannot be redeemed for the time being. From now on, Yindou.com will cease operations." At that time, Yindou.com had a total outstanding amount of 4.33 billion yuan and 23,464 lenders to be collected. The police then issued a red warrant for Li Yonggang and others through Interpol. On September 27 of that year, Li Yonggang was persuaded to return from abroad and arrested.

On January 3, 2019, the case involving Li Yonggang, Wang Pengcheng and others suspected of fundraising fraud was reported by the Haidian District People's Procuratorate of Beijing to the First Branch of the Beijing Municipal People's Procuratorate for review and prosecution.

Some investors tracked and found that a large amount of funds raised by Yindou.com flowed into Zhejiang Yibang, which was rushing to be listed in Hong Kong at the time, and several transfers were made through private accounts. An investor of Yindou.com said: From December 2017 to February 2018, Cui Hongwei, the wife of Li Yonggang, the actual controller of Yindou.com, transferred a total of 524.9 million yuan to Zhejiang Yibang; and from March to April 2018, Zhejiang Yibang transferred a total of 380 million yuan to Cui Hongwei. Not only that, Zhu Xiaolin, the financial officer of Yindou.com, also appeared on the list of investors of Zhejiang Yibang. When the relevant person in charge of Zhejiang Yibang received investors, he said that 380 million yuan was returned, and the remaining part was for the purchase of equipment, which was a normal contract payment.

It is worth noting that Zhongying Internet stated in its reply to the Shenzhen Stock Exchange's inquiry letter on the 2018 semi-annual report: As of June 30, 2018, the company's prepaid balance to Zhejiang Yibang was 100 million yuan, the total amount of agency procurement contracts was 454 million yuan, the cumulative prepayment was 380 million yuan, and 380 million yuan had been settled - before and after Zhejiang Yibang returned 380 million yuan, the settlement amount of the agency procurement contract between Cailiang Technology and Zhejiang Yibang was exactly 380 million yuan.

Zhejiang Yibang's prospectus shows that in 2017, the company's blockchain business generated revenue of 925 million yuan, of which "Cui Hongwei" ranked as the largest customer of the year with a sales share of 12.1% (about 112 million yuan); in the first half of 2018, Zhejiang Yibang's blockchain business generated revenue of 2.124 billion yuan, of which Cailiang Technology ranked as the largest customer of the year with a sales share of 17.7% (about 376 million yuan).

The recording provided by Cailiang Technology's attorney shows that Gu Hongliang said: "I paid you, and you sent the goods to Hu Liang because you thought Hu Liang received them on behalf of Li Yonggang." Zhang Hao responded, "Yes." Gu Hongliang then said, "If you think you received the goods on behalf of Li Yonggang, then Li Yonggang should owe you, isn't that right?" Zhang Hao responded again, "Yes, it is."

"It is very clear that Cailiang Technology did not receive the goods, but Cailiang cooperated with Yibang to stamp these seals, so now Yibang is looking for Cailiang to take the blame." Cailiang Technology's attorney said that the real transaction in this case was actually that Li Yonggang first found Zhejiang Yibang to buy mining machines, and Zhejiang Yibang introduced Li Yonggang's team to Gu Hongliang, asking Gu Hongliang to help Li Yonggang do procurement through Cailiang Technology. Later, Li Yonggang was arrested, which became a turning point in this transaction.

Cailiang Technology's attorney said, "Because they found they couldn't get money from Li Yonggang, they started looking for ways to make Cailiang take on the responsibility of paying for the goods."

Zhejiang Yibang's attorney responded that during the transaction between the two parties, Zhejiang Yibang had always believed that Hu Liang and Zhao Junjie were employees and agents of Cailiang Technology. "Therefore, these two people can represent Cailiang Technology in transactions with Zhejiang Yibang, and the results they confirmed should also belong to Cailiang Technology."

However, what is strange is that when the Securities Times e-company reporter contacted Zhao Junjie on December 20, he said that he had not received any goods, "I have never received any. I have not received any machines."

On the afternoon of December 23, a reporter from Securities Times and e-company visited the 26th floor of Qianjiang International Plaza in Hangzhou, which is the office location of Zhejiang Yibang. The staff said that there were dozens of staff members on the 26th floor, but the relevant leaders were not in the company, so it was not convenient to accept interviews. The e-company reporter called Zhang Hao, the person directly responsible for this transaction. He said that he was on a business trip and the relevant matters were subject to the company's statement. "For Yindou.com, we have disclosed everything that can be made public." Then Zhang Hao hung up the phone. The e-company reporter then contacted Wang Hongyong, vice president of Zhejiang Yibang, to interview him about Yindou.com and Cui Hongwei's procurement. Wang Hongyong responded, "It's been a long time since the incident, and it's been handled. I don't remember it clearly."

On December 26, the reporter contacted Cailiang Technology, and the staff responded after consulting the leader, "The leader said, just read the announcement."