Canaan Used ‘Bogus’ Deal to Entice Funding, Argues Analyst

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A report by Marcus Aurelius Worth, an evaluation group, argues that the Nasdaq-listed ASIC producer Canaan (NASDAQ: CAN) misrepresented its potential income for 2020. At the least considered one of its shoppers is an alleged associated get together who’s unable to honor the $150 million buy contract.Aurelius Worth additionally considers Canaan’s AvalonMiner collection to be uncompetitive inside the ASIC market, noting that the producer’s R&D price range is vastly inferior to rivals like Bitmain.Following the Feb. 20 report, the analysts have deemed the corporate’s inventory to be uninvestable and revealed that they’ve entered into quick positions.Canaan representatives responded to a few of the claims after a number of Cointelegraph inquiries. Aurelius Worth, in flip, didn’t reply to Cointelegraph’s inquiries on methodology — however we nonetheless discovered that a few of the analysts’ conclusions will not be totally right.Alleged shopper irregularitiesThe analysts’ core argument towards Canaan lies in what it claims to be a extremely irregular transaction pertaining to its Nov. 27 preliminary public providing. One month earlier than the IPO, a “strategic partnership” was struck with Hong Kong Alternate-listed firm Grandshores (HK 1647), which might have the corporate buy as much as $150 million price of apparatus. This transaction presents a number of irregularities, based on Aurelius Worth. That one order would symbolize nearly the whole lot of Canaan’s income previously twelve months, which amounted to $177 million. Moreover, they argue that Grandshores has no manner of honoring the settlement, citing its $50 million market cap and $16 million money stability. Most notably, Grandshores seems to be a associated get together to Canaan. Hong Kong Inventory Alternate filings checklist Yao Yongjie as its chairman, whereas Canaan’s Securities and Alternate Fee filings disclose that Yao Yongjie is a companion at an organization that owns 9.7% of Canaan shares. A Reuters profile additional mentions Yongjie as an angel investor in Canaan.Canaan’s gross sales director Chen Feng held a livestream shortly earlier than the deal was struck, promising that Canaan had letters of intent for greater than 500,000 items, which led him to count on revenues of greater than $1 billion in 2020.The analysts concluded their argument:“We subsequently marvel if the enormous Grandshores letter of intent, which we view as largely bogus, was utilized by CAN as a tool to hype its monetary prospects to buyers.”From a regulatory perspective, if the analysts’ conclusion is correct, the failure to incorporate this as a associated get together transaction in Canaan’s IPO filings dated after Oct. 27 might even have penalties. Corporations are required by legislation to report dealings with entities with which its shareholders or executives have relationships in quarterly and annual filings with the SEC. Canaan representatives responded to Cointelegraph’s request for touch upon this transaction. They maintained that Yao Yongjie is just not the proprietor of the stakeholder firm talked about within the filings and that he owns lower than 1% of Canaan shares.Additionally they emphasised that the Grandshores contract is just not a proper gross sales contract. The representatives defined:“It’s a framework settlement between two events which Canaan granted Grandshores as a distributor and allow him to resale not more than $150 million of miners.”The allegedly casual nature of the contract was additionally cited as the rationale for not together with it within the SEC prospectus, reportedly to “keep away from deceptive and to guard our IPO buyers,” the representatives mentioned.Cointelegraph reached out to the legislation agency entrusted with conducting the IPO for additional clarifications, however didn’t obtain a response.Canaan’s shoppers talked about in Canaan’s earlier public itemizing makes an attempt in 2016 and 2017 additionally confirmed a number of irregularities, based on the analysts.Poor product and enterprise modelAurelius Worth concluded its evaluation by reporting perceived flaws with Canaan’s enterprise mannequin and product line. In response to SEC filings, the corporate started providing credit score gross sales because the market dropped in 2018, which it says “brought about our prospects who bought our Bitcoin mining merchandise on credit score to be much less prepared to make cost.” As well as, Canaan was concerned in a lawsuit for failed cost of a $1.7 million bill. The analysts famous:“At minimal, we imagine the plunge in Bitcoin costs that started in late 2017 has had a devastating affect on CAN’s enterprise.”Aurelius Worth additionally argued that Canaan miners are totally uncompetitive available in the market, reporting information from the web site asicminervalue.com. They preserve that Canaan’s enterprise mannequin is “the wrong way up” as all its miners merely generate income at a loss.Nevertheless, this conclusion was reached through the use of default settings on the aggregator web site, which put electrical energy value at $0.12 per kilowatt-hour (KWh). Few mining operations would ever be worthwhile at these charges — many of the exercise is concentrated in particular areas the place low-cost electrical energy might be discovered. One such instance is Quebec, the place charges can go as little as 0.05 Candian {dollars} ($0.037).Below these situations, Canaan miners might be worthwhile, although they’re usually much less environment friendly when it comes to hashes per watt ratio. Whereas the decrease effectivity might ultimately make them out of date, Canaan miners are sometimes less expensive than comparable choices from Bitmain. For instance, utilizing electrical energy costs of $0.04, Canaan’s AvalonMiner 1066 generates an estimated $1,600 yearly revenue, whereas it prices roughly $1,500. Bitmain’s S17+ would result in $3,000 in revenue at present charges, however its common value is round $2,850. The 2 miners would thus take an identical period of time to pay themselves off.Whereas Aurelius Worth raises necessary questions concerning the profitability of Canaan ASICs, the miners are nonetheless aggressive beneath at the very least some circumstances. However, the ASIC mining trade extra broadly faces large strain from the Bitcoin (BTC) halving. Bitmain reportedly laid off 50% of its employees in preparation for the abrupt mining income dip.Unclear gross sales practices and the character of the mining trade could level to the next funding threat than conventional markets can be accustomed to accepting.

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