Canaan Technology: I lost 1 billion last year, but I still have enough money in my account to live for another year

Before the U.S. stock market opened on April 9, Canaan Inc. (NASDAQ: CAN), the world's second largest mining machine manufacturer, announced its unaudited financial report for the fourth quarter and full year of 2019. This is also Canaan Inc.'s first financial report since it was listed on the Nasdaq on November 21, 2019, Eastern Time.

According to the financial report, Canaan Technology's total net revenue in the fourth quarter was 463 million yuan (about 66.5 million U.S. dollars), a year-on-year increase of 66.8%, and a net loss of 798 million yuan (about 115 million U.S. dollars). In comparison, the net loss in the same period last year was 27.5 million yuan.

In fiscal year 2019, Canaan Technology's total net revenue was RMB 1.42 billion (approximately US$204 million), down 47.6% from RMB 2.705 billion in the same period last year. The company suffered a net loss of RMB 1.035 billion (approximately US$149 million) for the full year, compared with a net profit of RMB 122 million in the same period last year. The company's performance declined significantly, turning from profit to loss for the full year.

Due to the impact of the epidemic on the global financial market environment and the overall downturn of Chinese stocks in the U.S. stock market, Canaan Technology closed at US$3.2 per share as of the close of the U.S. stock market on Thursday, down 9.09% in a single day and 64% from its IPO issue price of US$9.
Loss of 1 billion a year, sufficient cash flow

From the fourth quarter of 2019, Canaan Technology's total net revenue was 463 million yuan, a year-on-year increase of 66.8%. The company explained that this growth was mainly driven by the increase in total computing power sold. In the fourth quarter, Canaan Technology's total computing power sold reached 2.9 million Thash/s, a year-on-year increase of 86.6%.

At the same time, Canaan Technology's revenue cost in the fourth quarter was RMB 1.1367 billion, a significant year-on-year increase of 327.17% compared with RMB 266.1 million in the same period last year.

The increase in cost of revenue was due to a write-down of RMB 729 million in inventory and prepayments. The company further explained that Bitcoin fell sharply during the reporting period, resulting in a significant drop in demand and sales prices.

Canaan Technology's main financial data

In addition, in 2019, Canaan Technology's revenue fell by nearly 50% year-on-year. It is understood that this is related to the company's increased R&D expenses and administrative expenses.

In 2018, Canaan Technology's R&D expenses were RMB 189 million, and in 2019, they were RMB 169 million. However, R&D expenses accounted for 11% of total revenue in 2019, higher than 7% in 2018. In addition, administrative expenses reached RMB 347 million in 2019, mainly used for share-based compensation expenses for core R&D personnel.

It is worth noting that Canaan Technology has abundant cash flow. The financial report shows that as of December 31, 2019, Canaan Technology had 517 million yuan in cash and cash equivalents. Canaan Technology stated that the existing cash and cash equivalents and the expected cash flow from operating activities will meet the company's expected working capital needs and capital expenditures in the normal course of business in the next 12 months.

Canaan Technology CEO Zhang Nangeng said: "In the fourth quarter of 2019, we achieved solid year-on-year growth while further consolidating our market leadership. To drive our growth in the coming years, we will continue to focus on optimizing our supply chain, strengthening our product offerings, and executing our new business plans."
AI chips are gaining momentum

As we all know, Canaan is a company that started out as a Bitcoin mining machine company. Since 70-80% of the cost of the mining machine business is chips, the core of the mining machine is still the ability of the chip business.

In mid-December last year, Kong Jianping, co-chairman of Canaan Technology, said in an interview with the media, "In 2015, we made a strategic plan. At that time, we had two paths to choose from: one was to lay out the entire industrial chain around blockchain and Bitcoin, and the other was to lay out the entire industrial chain around chips."

At that time, they believed that if the entire blockchain or digital currency industry was large enough in the future, it would be impossible to be the first in every field by deploying the entire industry chain. Therefore, they chose to focus on one field in the first phase, that is, to start deploying the AI ​​chip field.

Currently, Canaan Technology’s two core businesses are blockchain and dedicated AI chip design.

Regarding mining machine chips, Zhang Nangeng said that in the first quarter of this year, the research and development of new products was not affected by the epidemic and had been completed in February. Compared with the previous generation of mass-produced products, this product has reduced costs while improving the performance-to-power ratio by about 20-30%, and is in a leading position in the industry. In addition, our products based on TSMC's 5nm technology are also being intensively developed.

In addition to chips, Canaan Technology has also improved the hardware and software design platform of blockchain computing equipment products. In addition, the company is also promoting the research and development of advanced technologies such as liquid cooling. In terms of software, the company has begun to provide native support for cloud mining software systems in pre-installed software, which is in line with its future business development direction.

In terms of AI business, Canaan Technology has established strategic cooperation with leading domestic customers based on the edge AI chip K210. In terms of AI products, during the epidemic, the facial recognition access control system was upgraded to enable it to identify people wearing masks and remind employees who are not wearing masks. At the same time, the intelligent attendance system was also integrated to assist human resource management.

It is revealed that Canaan's AI chips and modules are currently popular among North American customers; in Japan, the K210 chip module of Canaan has a developer community base. Canaan plans to launch the second-generation AI chip product K510 this year, claiming that its performance is several times that of the first-generation product and can adapt to more application scenarios.

Due to the current downturn in the global financial market, Canaan Technology has lowered its expectations for its business in 2020. In the financial report, Canaan Technology expects its total revenue in the first quarter to be less than 60 million yuan.
Canaan "Questioned"

In February of this year, an American investment analyst named Marcus Aurelius wrote an investigative report that was bearish on Canaan Inc., directly pointing out that Canaan Inc. had related-party transactions, was entangled in lawsuits, and its clients were involved in major commercial frauds. "We regard Canaan Inc. as a Chinese company that has deceived American investors."

The investigation report wrote that before Canaan Inc. went public in the United States, Hong Kong-listed Xiongan Technology (1647.HK) agreed to purchase equipment worth up to $150 million in 2020, which is almost equivalent to Canaan Inc.'s entire revenue of about $177 million in the past 12 months. Xiongan Technology's market value is only $50 million, with less than $20 million in cash on its books. Yao Yongjie, chairman of Xiongan Technology, is Canaan Inc.'s "angel investor" and owns 9.7% of Canaan Inc.'s outstanding shares through entities controlled by him.

The report also pointed out that Hangzhou Weitui Information Technology Co., Ltd., as an affiliated company of Canaan Technology, was suspected of inflating Canaan Technology's sales. In addition, the report also wrote about the company's major customers involved in major commercial fraud and violations.

According to a report by Titanium Media on March 6, an investor of Canaan Inc. has formally filed a lawsuit, claiming that the company violated the U.S. Securities Act. The lawsuit was filed in the U.S. District Court of Oregon on March 4. In addition to suing Canaan Inc., the plaintiff also sued the underwriters of Canaan Inc.'s IPO, including Galaxy Digital, China Renaissance Capital, Huatai Financial Holdings, and CMB International Financial.

It is understood that the plaintiff is named Phillippe Lemieux. He purchased 200 shares of Canaan Technology at a price of US$8.5 on February 12, close to the highest price in nearly a month.

According to news on April 7, Eastern Time, the US law firm Robbins Geller Rudman & Dowd LLP announced that the deadline for selecting the lead plaintiff in the Canaan Inc. class action lawsuit is May 4, 2020. Before then, Canaan Inc. shareholders need to decide on a representative to participate in the lawsuit. According to media reports, Canaan Inc. officials have not yet responded to this matter. (ChainDD)