Ebang International faces further obstacles in its IPO road due to lawsuit over "problematic mining machines"

Nuclear Finance APP reported on November 12 that on November 1, 2018, many online media reported that Yibang International Holdings Co., Ltd. (hereinafter referred to as "Yibang International") had its listing procedures suspended by the Hong Kong Stock Exchange because it was suspected of participating in illegal financial activities.

However, the 500 million yuan transaction with Yindou.com, which has been identified as illegal fundraising, is not the only worry for Ebang International. As the world's third largest cryptocurrency mining machine manufacturer, the production and sales of its core business of mining machines have always been accompanied by criticism and disputes.

The Hangzhou Internet Court has just pronounced a verdict on a contract dispute involving the sale of mining machines. Although the verdict of this case was favorable to Zhejiang Ebang Communication Technology Co., Ltd. (hereinafter referred to as "Ebang Communication"), the operating entity of Ebang International, Ebang Communication was sued again shortly afterwards. In the same dispute over the sale of mining machines, the plaintiff Ma Xiaoyun (pseudonym) accused Ebang Communication of false advertising and false promises, and the amount of the claim was as high as more than 50 million yuan.

Ebang Communications showcases its products at the 2016 Mobile World Congress. Image source: Ebang Communications official website

The "best performing Bitcoin mining machine" is born

The judgment issued by the Hangzhou Internet Court on October 10 was favorable to Ebang Communications.

The plaintiff in this case, Mr. Chen, purchased a Bitcoin mining machine worth 612,000 yuan from Ebang Communications. Later, he claimed that the transaction of Bitcoin mining machines was suspected of being illegal, and that consumers had the right to return the goods without reason within seven days from the date of receipt of the goods, on the grounds that the People's Bank of China required the cessation of various token issuance and financing activities. He demanded that the defendant Ebang Communications return the full amount of the goods and pay interest.

The Hangzhou Internet Court ruled that Bitcoin is a virtual item, and mining machine and other related transactions have policy and business risks, but under the premise of not violating the law, the contract signed by the two parties is a valid contract, and neither party has the right to terminate it at will. The court therefore ruled that the mining machine sales contract signed by the plaintiff and the defendant through the Internet in the form of data telegrams was established and rejected the plaintiff's lawsuit.

Ma Xiaoyun has been following this case because she also purchased a Bitcoin mining machine from Ebang Communications for a larger amount, and she also sued Ebang Communications.

A few years ago, Ma Xiaoyun learned about digital currency and digital currency "mining" through the introduction of friends around him. He bought mining machines with friends to mine Ethereum and made good profits. Ma Xiaoyun, who entered the digital currency "mining circle", influenced more relatives and friends. They all paid attention to the price of digital currency and the development of digital currency mining machine technology.

On December 20, 2017, Ebang Communication held a product launch conference in Hangzhou and launched new Bitcoin mining machines E9++ and E10. The E10 mining machine in the official propaganda used 10nm (nanometer) process chips for the first time. Each computing board is equipped with 70 DW1228 chips, with a wall power consumption ratio of 90W/T and a computing power of up to 18TH/S (trillion hashes per second).

The E10 mining machine, which was launched in December 2017 when the price of Bitcoin was high, has a high failure rate and return rate. Source: Ebang International's IPO application document (Traditional Chinese)

The Bitcoin system designed by Satoshi Nakamoto is actually a ledger. Bitcoin blockchain nodes that complete bookkeeping can receive Bitcoin as a reward. About every 10 minutes, someone will successfully record the Bitcoin blockchain. Nodes compete to obtain the sole right to record by solving cryptographic problems (i.e., proof of work POW). This process is called "mining."

As the price of Bitcoin skyrocketed, more and more people mined Bitcoin. Ordinary computers were almost unable to obtain the right to record and obtain Bitcoin because of their low computing power. A large number of professional mining machines with powerful computing power entered the market, forming the digital currency mining machine manufacturing industry. China's Bitmain, Canaan Creative, and Ebang Communication are among the best.

In professional mining machines, computing power is the most important indicator (1T=1024G, 1G=1024M, 1M=1024k). In December 2017, when Ebang Communication released the E10 mining machine, the mainstream mining machine on the market was the AntMiner S9 produced by Bitmain with a 16nm chip, with a rated computing power of 13.5 TH/S. The computing power of the E10 mining machine was as high as 18TH/S, making it the best-performing Bitcoin mining machine known on the market at that time.

A friend of Ma Xiaoyun attended the new product launch of Ebang Communication in Hangzhou, sent her photos and videos and placed an order on the spot. Ma Xiaoyun, who already had some knowledge of digital currency mining, carefully studied the various indicators of the E10 mining machine in the promotional materials and confirmed that it was the best mining machine at the time. She then invested all her savings and raised funds among relatives and friends to contact Ebang Communication to purchase it.

Ten million yuan to buy mining machine futures

In December 2017, the price of each Bitcoin reached nearly 20,000 US dollars. Bitcoin gold diggers flocked into the market, and the digital currency mining industry entered its heyday. High-quality Bitcoin mining machines were snapped up, and it was difficult to hold the currency.

Ma Xiaoyun contacted Liu Hao, the sales manager of Ebang Communications, to negotiate the purchase of the E10 mining machine, but was told that there was no spot stock and that he could only purchase futures that would arrive at the end of February or March 2018, and that he had to sign the contract quickly and pay in advance.

On December 25, Ma Xiaoyun signed a contract with Liu Hao to purchase 200 E10 mining machine futures that were to arrive at the end of March 2018 at a price of RMB 23,400 per unit, and then remitted the entire payment of RMB 4.68 million to Ebang Communications. After raising funds again, on December 27, Ma Xiaoyun signed another contract with Liu Hao to purchase 300 E10 mining machine futures that were to arrive at the end of February 2018 at a price of RMB 28,800 per unit, and remitted the entire payment of RMB 8.64 million to Ebang Communications. In total, Ma Xiaoyun purchased 500 E10 mining machines and paid RMB 13.32 million to Ebang Communications.

Ebang International's operating entity, Ebang Communications, was founded by Hu Dong. It was previously engaged in the development and sales of communication network access equipment and related equipment. It started the development of digital currency mining machines in 2014 and landed on the New Third Board in 2015 as "Zhejiang Ebang". It was delisted from the New Third Board on March 23, 2018 and prepared for reorganization. The reason for the delisting, Ebang International stated in the listing application submitted to the Hong Kong Stock Exchange on June 24, 2018, was that "the trading of New Third Board listed shares has not been active."

According to the listing application document, as of June 4, 2018, the largest shareholder of Yibang International is the company's founder Hu Dong, who holds 53.83% of the shares; in addition, members of the Hu family hold a total of 13.67% of the shares, Hong Kong Litian holds 1% of the shares, senior employees of the company hold 5.27% of the shares, and other shareholders hold 26.23% of the shares.

Ebang International's equity structure as of June 4, 2018. Source: Ebang International's IPO application documents (Traditional Chinese)

The listing application documents show that Ebang International's main businesses are ASIC (application-specific integrated circuit) chip design, telecommunications business, and design, production and sales of blockchain processors or "BPUs" or "mining machines." According to iResearch Consulting, in 2017, Ebang International's market share reached 11.0% based on global sales revenue and 10.9% based on global sold computing power, making it one of the world's three largest manufacturers of Bitcoin mining machines.

Ebang International's sales revenue and computing power sold in 2017. Source: Ebang International's IPO application documents (Traditional Chinese)

The first and second largest market share companies in the industry are Bitmain and Canaan Creative, respectively, with a combined market share of 90%. Currently, all three companies have submitted listing applications to the Hong Kong Stock Exchange.

Data disclosed in the listing application documents show that Ebang International sold 158,800 mining machines in 2017, with a total computing power of 1.38 million TH/s, and the average selling price per TH/s was RMB 649 as of December 31, 2017. The revenue of the blockchain business, including the production of mining machines, increased more than 30 times from RMB 29.2 million in 2015 to RMB 925.4 million in 2017. Its traditional telecommunications equipment business fell from 68.3% of revenue in 2015 to 5.4% in 2017, while the mining machine production business rose from 31.7% to 94.6%. The company's profit in 2015 was RMB 24.2 million. After gradually shifting its focus to the development of Bitcoin mining machines within two years, its net profit in 2017 reached RMB 385 million.

Details of Ebang International’s blockchain business revenue and percentage of total revenue from 2015 to 2017. Source: Ebang International’s IPO application documents (Traditional Chinese)

Details of changes in Ebang International’s blockchain and telecommunications businesses from 2015 to 2017. Source: Ebang International’s IPO application documents (Traditional Chinese)

Star mining machines may have quality problems

At the new product launch conference, Ebang Communication used the reputation of a company listed on the New Third Board to guarantee product quality and service. Ma Xiaoyun said that although she didn't know that Ebang Communication was going to be listed on the Hong Kong Stock Exchange at that time, the name of a company listed on the New Third Board was enough for her to trust.

However, this was not the case. The 300 E10 mining machine futures that were to arrive at the end of February 2018 in the agreement were not delivered on time. At that time, the price of Bitcoin was high, and the earlier you mined, the earlier you could make money. An anxious Ma Xiaoyun called Ebang Communication many times, urging them to ship the goods as soon as possible, and even rushed to Hangzhou on March 19 to request a return. But it was not until March 25 that she received 100 and 130 E10 mining machines in two batches, and another 70 on March 28. The 300 E10 mining machine futures that were supposed to arrive at the end of February were not delivered until then.

On March 29, Ma Xiaoyun received another 200 E10 mining machine futures that were due to arrive at the end of March. She said that the two batches of E10 mining machines were exactly the same, but the price difference was 5,400 yuan per machine. In order to receive the goods early to mine Bitcoin, she paid an extra 1.62 million yuan for 300 mining machines.

Ma Xiaoyun suppressed his dissatisfaction with Ebang Communication and hurriedly installed mining machines to mine Bitcoin while negotiating compensation for the delayed delivery. However, starting from March 25, when the first batch of goods arrived, some mining machines could not operate. On the second day, 12 mining machines could not operate, followed by 18 on the third day, 33 on the fourth day... Almost every day, there were mining machines that could not operate.

At the request of the Ebang Communication staff, Ma Xiaoyun sent them the serial number, photos and waybill number of the downtime mining machine. The Ebang Communication engineers remotely checked and believed that the problem of the mining machine was the power supply, control board and computing board, and instructed Ma Xiaoyun to "clean the gold finger" (a computer maintenance technology), reverse the computing board, replace the controller, and replace the new version of the software, replace the hardware, and replace the power supply. However, the problem has not been solved and the E10 mining machine has frequent failures.

In desperation, Ebang Telecom and other customer service staff agreed to let Ma Xiaoyun send the mining machine back to Hangzhou for repair. In just 90 days from March 30 to June 28, the number of E10 mining machines returned for repair reached an astonishing 873 times, and Ma Xiaoyun paid 17,619 yuan for the shipping fee alone.

On June 27, Ma Xiaoyun went to Hangzhou Ebang Communication Company again to negotiate about the delivery delay and quality issues of the E10 mining machine. In the on-site recording provided by Ma Xiaoyun, Cai Chunhua, after-sales service manager of Ebang Communication, and Zhang Hao, vice president, both admitted that the failure rate and return rate of the E10 mining machine were high. Zhang Hao even explained that the reason for the high failure rate was that the power supply and the mining machine were combined into an "all-in-one machine". They also admitted that the data of the E10 mining machine claimed at the press conference was laboratory data, and there were "some gaps" in actual operation, such as the computing power failed to reach 18TH/S.

On November 10, Nuclear Finance called several Ebang Telecom staff members. Zhang Hao denied that he knew about the mining machine sales dispute with Ma Xiaoyun. Sales manager Liu Hao said that Ma Xiaoyun's 500 E10 mining machines were sold through him, and he also participated in the negotiation of disputes caused by quality issues. However, after rechecking the identity of the Nuclear Finance reporter, he refused to provide more information.

Sued to Hangzhou Intermediate Court for 50 million yuan

Although verbally admitting that the E10 mining machine had a high failure rate and return rate, Ebang Communications rejected Ma Xiaoyun's request for a return and only agreed to sign a supplementary agreement to provide an additional 50% of the total computing power of the original contract.

Ma Xiaoyun did not accept Ebang Communication's conditions and complained to the Yuhang District Quality and Technical Supervision Bureau of Hangzhou City, alleging that the company was suspected of "selling three-no fake products". In addition to quality issues such as downtime, Ma Xiaoyun's complaint also included the following reasons: the product and its outer packaging did not have the necessary information about the product, such as the manufacturer, production date, product manual, and certificate of conformity, making it a "three-no product". On July 4, the Yuhang District Quality and Technical Supervision Bureau issued a case acceptance notice, accepting the complaint and attempting to organize the two parties to negotiate a solution, but to no avail.

Ma Xiaoyun filed a complaint with the Hangzhou Quality and Technical Supervision Bureau on the grounds that Yibang Communications was suspected of "selling three-no counterfeit products" and the complaint was accepted.

Subsequently, Ma Xiaoyun took Ebang Communications to court. Ma Xiaoyun's complaint stated that Ebang Communications was responsible for the late delivery of the first batch of 300 mining machines, and was responsible for the serious lack of computing power and serious excess power consumption of all mining machines, which caused the products to not be used normally. In addition to demanding the return of 13.32 million yuan in payment and interest, Ma Xiaoyun also required Ebang Communications to pay 39.96 million yuan in compensation, three times the price stipulated in the Consumer Rights Protection Law, and 164,160 yuan in liquidated damages for late delivery of products, as well as 17,619 yuan in logistics costs and 28,445 yuan in travel expenses to Hangzhou for communication and negotiation, totaling 53,893,730 yuan in compensation.

Ma Xiaoyun's agent, Xu Kai, a lawyer at Beijing Deheng Law Firm, told Nuclear Finance that they will submit to the court a number of evidences that the E10 mining machine has serious quality problems. At the same time, actual tests have shown that the E10 mining machine received by customers not only has a computing power far less than the 18TH/S claimed by Ebang Communication, but the actual power consumption is also inconsistent with the publicity.

Compared with other mining machines with about 100 chips built in, the E10 mining machine has an excessively large number of built-in chips of 210. Does this cause the machine's operating temperature to rise and cause failures? An industry insider who did not want to be named said that from a technical point of view, the bottleneck limiting the density of chips in a single machine is heat dissipation. The high power consumption of computing chips is due to the large amount of heat dissipation. If the heat cannot be discharged in time, the mining machine will be unstable or even stop working. "Therefore, blindly increasing the number of chips is not necessarily a good thing."

It is worth noting that according to the listing application documents submitted by Ebang International on June 24, 2018, the company launched a new mining machine E9.2 in May, which is an improved version of E10. The number of built-in ASIC chips and the hash rate were reduced to 108 blocks and 12 TH/S respectively.

On September 3, the Hangzhou Intermediate People's Court issued a case acceptance notice, announcing that it had accepted Ma Xiaoyun's case against Ebang Telecom for a sales contract dispute. The case has not yet been heard.

The Hangzhou Intermediate People's Court accepted the case in which Ma Xiaoyun sued Yibang Communications.

Since submitting its listing application to the Hong Kong Stock Exchange on June 24, Ebang has been in trouble. The Yindou.com fraud case has cast a shadow on its listing plan. It is unknown what consequences this lawsuit involving mining machine quality issues will bring. If this case can establish standards for the quality of digital currency mining machines, establish industry standards and even national standards, it will be a good thing for the booming blockchain industry.