Intchains(ICG) - 2023 Q4 - Annual Report

Part I Key Information Intchains Group, a fabless ASIC chip provider for blockchain, faced a significant revenue decline and net loss in 2023 amid market volatility - The company operates a fabless business model, specializing in the design of high-performance computing ASIC chips for blockchain applications, utilizing its proprietary "Xihe" Platform[15][16] Key Financial Performance (2021-2023) | Metric | 2021 (RMB) | 2022 (RMB) | 2023 (RMB) | 2023 (USD) | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | 631.8 million | 473.7 million | 82.2 million | 11.6 million | | Net Income/(Loss) | 450.1 million | 355.2 million | (26.8 million) | (3.8 million) | - Despite market challenges, the company is pursuing strategic growth by developing a new 12nm process node ASIC chip (mass production expected in March 2024) and expanding into Singapore through the acquisition of assets from the Goldshell WEB3 brand[18] - The company is a Cayman Islands holding company with primary operations in mainland China through directly-owned subsidiaries, not a Variable Interest Entity (VIE) structure[20][22] - The company's auditor is based in New York and is currently subject to PCAOB inspection. The PCAOB vacated its determination of being unable to inspect firms in mainland China and Hong Kong in December 2022, reducing the immediate risk of delisting under the HFCA Act, though future determinations remain a risk[33][159] Risk Factors The company faces significant financial, operational, and regulatory risks, including cryptocurrency market volatility and concentrated control by co-founders - The company incurred a net loss of RMB26.8 million (US$3.8 million) in 2023, and its profitability is highly correlated with the volatile market prices of cryptocurrencies[42][45] - Operations are heavily dependent on a single third-party foundry partner for ASIC chip manufacturing, creating significant supply chain risk. In 2023, purchases from this partner accounted for 66.0% of total procurement[61][62] - All revenue is generated from customers in the PRC, exposing the company to adverse developments in the Chinese regulatory environment, particularly concerning cryptocurrency mining[59] - The dual-class voting structure grants co-founders Mr. Qiang Ding and Mr. Chaohua Sheng approximately 92.0% of the aggregate voting power, limiting the influence of other shareholders on corporate matters[109][190] - Uncertainties exist regarding the need for approval from Chinese regulatory bodies like the CSRC or CAC for offshore offerings, which could impact the ability to offer ADSs and their value[144][154] Information on the Company Intchains Group, a fabless IC design company, provides ASIC chip solutions for blockchain, leveraging its proprietary platform and R&D focus amidst complex PRC regulations - The company's products are primarily high-performance ASIC chips designed for mining various alternative cryptocurrencies, including Litecoin, Dogecoin, and Kaspa. In Q4 2023, it expanded its offerings to include computing equipment incorporating its own chips[239][243] - The proprietary "Xihe" Platform facilitates rapid and efficient development of a wide range of ASIC chips, achieving a 100% success rate on nine tape-outs for 22nm and 12nm chips as of December 31, 2023[233][246] - The company operates a fabless model, relying on a single leading semiconductor foundry for wafer fabrication and other partners for packaging, testing, and assembly[255][256] - As of December 31, 2023, the company had 133 full-time employees, with 99 (74.4%) dedicated to research and development[253][266] - The company is subject to PRC regulations that both encourage the IC industry through policies and restrict the cryptocurrency industry, such as classifying crypto mining as a phased-out industry and deeming crypto-related businesses as illegal financing activities[275][282][283] Operating and Financial Review and Prospects The company's 2023 financial performance saw an 82.6% revenue drop and a net loss, driven by cryptocurrency market volatility and inventory write-downs Consolidated Results of Operations (2022 vs. 2023) | Metric | 2022 (RMB) | 2023 (RMB) | Change (%) | | :--- | :--- | :--- | :--- | | Revenue | 473.7 million | 82.2 million | -82.6% | | Gross Profit | 386.7 million | 9.1 million | -97.6% | | Gross Margin | 81.6% | 11.0% | -70.6 p.p. | | Operating Expenses | 64.0 million | 74.0 million | +15.7% | | Net Income/(Loss) | 355.2 million | (26.8 million) | N/A | - The significant decrease in 2023 revenue was driven by the challenging cryptocurrency market, which led to lower sales volume and average selling prices for ASIC chips[376] - Cost of revenue in 2023 included approximately RMB24.7 million in inventory and prepayment write-downs, which significantly compressed the gross margin[377] Consolidated Cash Flow Summary (2023) | Cash Flow Category | Amount (RMB) | Amount (USD) | | :--- | :--- | :--- | | Net cash used in operating activities | (4.7 million) | (0.7 million) | | Net cash used in investing activities | (65.0 million) | (9.2 million) | | Net cash provided by financing activities | 51.2 million | 7.2 million | | Cash and cash equivalents at end of year | 694.8 million | 97.9 million | Directors, Senior Management and Employees The company's leadership, including co-founders Qiang Ding and Chaohua Sheng, oversees operations and talent incentives, supported by established board committees - The leadership team consists of co-founders Qiang Ding (Chairman & CEO) and Chaohua Sheng (Director & CTO), both with over 16 years of experience in the IC design industry[408][409] - For the year ended December 31, 2023, the aggregate cash compensation paid to all directors and executive officers was RMB4.4 million (US$0.6 million)[418] - The company adopted a 2022 Share Incentive Plan, with a maximum of 7,698,760 ordinary shares available for issuance as of the report date. Awards for 524,874 ordinary shares are currently outstanding[420] - The Board of Directors has established an Audit Committee, a Compensation Committee, and a Nomination and Corporate Governance Committee to oversee key corporate functions[430] Major Shareholders and Related Party Transactions Co-founders Qiang Ding and Chaohua Sheng collectively hold 91.97% of voting power, and the company reported no material related party transactions in 2022-2023 Major Shareholder Voting Power (as of March 18, 2024) | Shareholder | % of Total Ordinary Shares | % of Voting Power | | :--- | :--- | :--- | | Qiang Ding (Co-founder) | 39.40% | 67.88% | | Chaohua Sheng (Co-founder) | 13.98% | 24.09% | | Directors & Executive Officers Combined | 53.38% | 91.97% | - The company did not conduct any material transactions with related parties during the years ended December 31, 2022 and 2023[448] Financial Information The company reports no material legal proceedings and plans to retain earnings for expansion, with dividend payments subject to PRC regulations - The company is not currently a party to any legal proceedings that are likely to have a material adverse effect on its business or financial condition[450] - The company has no intention to declare or pay dividends in the near future, planning to retain earnings for business operations and expansion[451] Additional Information This section details tax consequences for investors, noting the company's Cayman Islands incorporation, PRC subsidiary taxes, and potential PFIC status for U.S. holders - The company is incorporated in the Cayman Islands and is not subject to profits, income, gains, or withholding taxes there[461] - Dividends paid by the company's PRC subsidiaries to their Hong Kong holding company may be subject to a withholding tax, potentially at a reduced rate of 5% under the China-Hong Kong tax treaty[363] - For U.S. federal income tax purposes, the company does not expect to be a Passive Foreign Investment Company (PFIC) for the current taxable year, but its status is tested annually and could change, which would result in adverse tax consequences for U.S. holders[223][473] Quantitative and Qualitative Disclosures About Market Risk The company faces significant market risks, including high customer and supplier concentration, and foreign exchange risk due to RMB-denominated revenues and USD-traded ADSs - Significant customer concentration exists, with two customers accounting for 56.2% and 41.9% of revenue in 2023[489] - The company has a high concentration of supplier risk, with purchases from its major third-party foundry partner accounting for 66.0% of total procurement in 2023[489] - The company faces foreign exchange risk as its revenues are primarily in RMB, while its ADSs are traded in U.S. dollars, exposing investment value to currency fluctuations[491][492] Part II Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, following remedial actions for prior weaknesses - Management concluded that as of December 31, 2023, the company's disclosure controls and procedures were effective[503] - Management assessed the internal control over financial reporting as effective as of December 31, 2023, based on the criteria in the Internal Control-Integrated Framework (2013) by COSO[506] - The company has taken remedial measures to address material weaknesses identified in 2021, which related to inadequate segregation of duties, lack of U.S. GAAP expertise, and insufficient written policies[509][510][511] Corporate Governance and Other Matters The company's corporate governance includes an audit committee financial expert, a code of ethics, and a cybersecurity framework, with certain Nasdaq exemptions as a foreign private issuer - The board has designated Mr. Conway Kong-Wai Lee as the audit committee financial expert[512] Principal Accountant Fees (Mazars USA LLP) | Fee Category | 2022 (RMB'000) | 2023 (RMB'000) | | :--- | :--- | :--- | | Audit fees | 3,680 | 4,275 | | Audit related fees | — | 2,266 | | Total | 3,680 | 6,541 | - As a foreign private issuer, the company relies on home country practices for certain corporate governance matters, exempting it from some Nasdaq rules, such as requiring a compensation committee composed entirely of independent directors[518] - The company has implemented a cybersecurity risk management framework and reported no material cybersecurity incidents during the year ended December 31, 2023[522][524] Part III Financial Statements This section presents the company's audited consolidated financial statements for 2021-2023, prepared under U.S. GAAP, with an unqualified opinion from Mazars USA LLP Consolidated Balance Sheet Highlights (as of Dec 31, 2023) | Account | Amount (RMB'000) | Amount (US$'000) | | :--- | :--- | :--- | | Total Assets | 979,250 | 137,925 | | Cash and cash equivalents | 694,750 | 97,854 | | Inventories, net | 41,767 | 5,883 | | Total Liabilities | 28,925 | 4,074 | | Total Shareholders' Equity | 950,325 | 133,851 | - The financial statements were audited by Mazars USA LLP, which provided an unqualified opinion, stating the financials are presented fairly in all material respects in conformity with U.S. GAAP[537] - Subsequent to year-end, in February 2024, the company completed the acquisition of the Goldshell brand and related assets for US$550,000[663] - As of December 31, 2023, the company's restricted net assets in the PRC, which are not readily transferable to the parent company as dividends, amounted to RMB157.8 million, or 17% of the Group's total consolidated net assets[664]