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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. No less than considered one of its shoppers is an alleged associated occasion who’s unable to honor the $150 million buy contract.
Aurelius Worth additionally considers Canaan’s AvalonMiner sequence to be uncompetitive inside the ASIC market, noting that the producer’s R&D finances is vastly inferior to opponents 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 brief positions.
Canaan representatives responded to a number 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 number of the analysts’ conclusions are usually not fully right.
Alleged consumer irregularities
The analysts’ core argument in opposition to 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 Trade-listed firm Grandshores (HK 1647), which might have the corporate buy as much as $150 million value of apparatus.
This transaction presents a number of irregularities, in accordance with Aurelius Worth. That one order would signify virtually the whole lot of Canaan’s income prior to now twelve months, which amounted to $177 million. Moreover, they argue that Grandshores has no method of honoring the settlement, citing its $50 million market cap and $16 million money steadiness.
Most notably, Grandshores seems to be a associated occasion to Canaan. Hong Kong Inventory Trade filings record Yao Yongjie as its chairman, whereas Canaan’s Securities and Trade Fee filings disclose that Yao Yongjie is a associate 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 models, which led him to count on revenues of greater than $1 billion in 2020.
The analysts concluded their argument:
“We subsequently marvel if the large 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 occasion 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 will not be 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 will not be 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, in accordance with the analysts.
Poor product and enterprise mannequin
Aurelius Worth concluded its evaluation by reporting perceived flaws with Canaan’s enterprise mannequin and product line. In keeping with SEC filings, the corporate started providing credit score gross sales because the market dropped in 2018, which it says “triggered our clients who bought our Bitcoin mining merchandise on credit score to be much less keen 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 fully uncompetitive out there, reporting knowledge from the web site asicminervalue.com. They keep that Canaan’s enterprise mannequin is “the other way up” as all its miners merely generate income at a loss.
Nevertheless, this conclusion was reached by utilizing 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 — a lot 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).
Underneath these circumstances, Canaan miners might be worthwhile, although they’re typically much less environment friendly by way of hashes per watt ratio. Whereas the decrease effectivity might finally 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 analogous period of time to pay themselves off.
Whereas Aurelius Worth raises essential questions concerning the profitability of Canaan ASICs, the miners are nonetheless aggressive underneath a minimum of some circumstances. Nonetheless, the ASIC mining business extra broadly faces super stress 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 business could level to the next funding danger than conventional markets could be accustomed to accepting.
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