IPO Update: Nano Labs (NA) Finalizes Proposed U.S. IPO Terms

A Quick Take On Nano Labs

Nano Labs Ltd. (NA) has filed to raise $37 million in gross proceeds from the sale of American Depositary Shares representing underlying Class A shares in an IPO, according to an amended registration statement.

The company develops ASIC chips for crypto mining machines and “metaverse”-related computing applications.

Nano Labs has produced revenue growth from a tiny base but is also generating high operating losses in a volatile crypto mining environment.

The IPO appears very highly priced, so I’m on Hold for the IPO.

Nano Labs Overview

Hangzhou, China-based Nano was founded to develop logic-memory integrated circuits for the ‘metaverse’ computing industry.

Management is headed by Chairman and CEO Jianping Kong, who has been with the firm since January 2021 and was previously co-chairman of the board of Bitcoin mining machine manufacturer Canaan (CAN).

The company’s primary offerings include:

• Cuckoo – near-memory HTC chips

• Darkbird – PC chips for Bitcoin mining

• iPollo – Bitcoin (and other cryptos) mining machine

• Darksteel – chips for distributed computing and data storage applications

Nano has booked fair market value investment of $31.6 million as of December 31, 2021, from investors including Nanometa Ltd and others.

Nano – Customer Acquisition

The company sells its chips and mining machines directly to both enterprises and individual buyers, with almost all of its revenue from buyers in China.

Nano seeks to expand operations outside of China so that its revenue will be produced primarily from overseas sources.

Selling & Marketing expenses as a percentage of total revenue have risen as revenues have increased, as the figures below indicate:

Selling & Marketing	Expenses vs. Revenue
Period	Percentage
2021	13.0%
2020	5.4%

(Source – SEC)

The Selling & Marketing efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Selling & Marketing spend, was 7.3x in the most recent reporting period. (Source – SEC)

Nano Labs’ Market & Competition

According to a 2022 market research report by Brand Essence Research, the global market for cryptocurrency mining equipment was an estimated $2.3 billion in 2021 and is forecast to reach nearly $5.3 billion by 2028.

This represents a forecast CAGR of 28.5% from 2022 to 2028.

The main drivers for this expected growth are the strong expected demand growth for cryptocurrency adoption and resulting demand for network security through mining functions.

Also, the expected transition by the Ethereum blockchain from Proof of Work to Proof of Stake may negatively affect the growth of the industry for a period.

Major competitive or other industry participants include:

• Canaan

• Ebang

• Bitmain

• BitFury

• Halong

• Other non-public companies

Nano Labs Financial Performance

The company’s recent financial results can be summarized as follows:

• Sharply growing topline revenue from a tiny base

• Gross loss and negative gross margin

• High operating loss

• Significant cash flow from operations

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

Total Revenue
Period	Total Revenue	% Variance vs. Prior
2021	$ 6,186,128	1957.9%
2020	$ 300,611
Gross Profit (Loss)
Period	Gross Profit (Loss)	% Variance vs. Prior
2021	$ (641,469)	-599.5%
2020	$ 128,420
Gross Margin
Period	Gross Margin
2021	-10.37%
2020	42.72%
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
2021	$ (28,041,767)	-453.3%
2020	$ 5,537,393	1842.0%
Net Income (Loss)
Period	Net Income (Loss)	Net Margin
2021	$ (27,439,260)	-443.6%
2020	$ (5,655,612)	-91.4%
Cash Flow From Operations
Period	Cash Flow From Operations
2021	$ 11,250,980
2020	$ (454,185)
(Glossary Of Terms)

(Source – SEC)

As of December 31, 2021, Nano had $36.7 million in cash and $146.6 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2021, was $9.9 million.

Nano Labs IPO Details

NA intends to sell 3.5 million American Depositary Shares representing 7 million underlying Class A shares at a proposed midpoint price of $10.50 per ADS for gross proceeds of approximately $36.75 million, not including the sale of customary underwriter options.

No existing or potentially new shareholders have indicated an interest to purchase shares at the IPO price.

Class A stockholders will be entitled to one vote per share and Class B shareholders will have 15 votes per share.

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

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO (excluding underwriter options) would approximate $550 million.

The float to outstanding shares ratio (excluding underwriter options) will be approximately 6.32%. A figure under 10% is generally considered a “low float” stock which can be subject to significant price volatility.

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

approximately 45%, or US$14.0 million for research and development initiatives for more advanced ASIC chips, smart-NICs, vision computing chips and our Metaverse computing network platform, Ipolloverse;

approximately 25%, or US$7.8 million for the establishment of our manufacturing plant for product assembling and supply chain optimization;

approximately 20%, or US$6.2 million for establishment of dual-headquarters in the United States and Singapore for our iPollo brand and our global sales network to promote our international sales; and

the remaining balance for working capital and other general corporate purposes.

(Source – SEC)

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

Regarding outstanding legal proceedings, management says the company is ‘currently not a party to any material legal or administrative proceedings.’

The listed bookrunners of the IPO are AMTD, Maxim Group and Tiger Brokers.

Valuation Metrics For NA

Below is a table of the firm’s relevant capitalization and valuation metrics at IPO, excluding the effects of underwriter options:

Measure [TTM]	Amount
Market Capitalization at IPO	$581,647,500
Enterprise Value	$550,223,601
Price / Sales	94.02
EV / Revenue	88.94
EV / EBITDA	-19.62
Earnings Per Share	-$0.49
Operating Margin	-453.30%
Net Margin	-443.56%
Float To Outstanding Shares Ratio	6.32%
Proposed IPO Midpoint Price per Share	$10.50
Net Free Cash Flow	$9,887,572
Free Cash Flow Yield Per Share	1.70%
Debt / EBITDA Multiple	-1.30
CapEx Ratio	8.25
Revenue Growth Rate	1957.85%
(Glossary Of Terms)

(Source – SEC)

Commentary About Nano Labs

NA is seeking U.S. public market investment to fund its continued research & development and commercialization efforts for its ASIC chip-powered crypto mining machines and related products.

The firm’s financials have produced growing topline revenue from a tiny base, gross loss and negative gross margin, large operating losses and high cash flow from operations.

Free cash flow for the twelve months ended December 31, 2021, was $9.9 million.

Selling & Marketing expenses as a percentage of total revenue have risen as revenue has jumped; its Selling & Marketing efficiency multiple was 7.3x for 2021.

The firm currently plans to pay no dividends on its shares and anticipates that it will use any future earnings to reinvest back into the business.

The market opportunity for its various semiconductor products is variable, with crypto mining ASICs alternating between strong demand during crypto market upswings to a sharp drop in demand and lower pricing during crypto market downdrafts.

The company’s CapEx Ratio is 8.25, which indicates it is spending significantly on capital expenditures as a percentage of its operating cash flow.

The market opportunity for its various semiconductor products is variable, with crypto mining ASICs alternating between strong demand during crypto market upswings to a sharp drop in demand and lower pricing during crypto market downdrafts.

AMTD is the lead underwriter and there is no data on the firm’s IPO involvement over the last 12-month period.

The primary risk to the company’s outlook is the volatile nature of the crypto mining pricing environment.

As for valuation, management is asking investors to pay an EV/Revenue multiple of nearly 89x, so the IPO appears priced to perfection despite an unfavorable crypto mining environment.

Nano has produced revenue growth from a tiny base but is also generating high operating losses in a volatile crypto mining environment.

I’m on Hold for the IPO.

Expected IPO Pricing Date: Month of July 2022.