Canaan Inc. — FY2019 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone Q4 filing; the supplied text does not provide separate fourth-quarter financial results. Financial statements are prepared under U.S. GAAP and audited by PwC Zhong Tian LLP, which issued an unqualified opinion.
Business context
Canaan designs ASIC chips and sells Bitcoin mining machines under the AvalonMiner brand; it also sells AI chips, parts and services, and began leasing mining machines in July 2019. The business remains highly concentrated in Bitcoin mining products, which accounted for 97.7% of 2019 revenue. The company is fabless and relies on external foundries, principally TSMC.
Key financial metrics
Amounts are RMB millions, except percentages and per-share data; U.S. dollar equivalents are shown where provided.
| Metric | FY2018 | FY2019 |
|---|---|---|
| Revenue | 2,705.3 | 1,422.6 (US$204.3) |
| Gross profit (loss) | 508.1 | (516.0) (US$(74.1)); margin approximately (36.3%) |
| Operating expenses | 375.1 | 538.5 |
| Net income (loss) | 122.4 | (1,034.5) (US$(148.6)); loss per share RMB0.4805 |
| Operating cash flow | (12.7) | (280.1) (US$(40.2)) |
| Investing cash flow | 84.0 | (16.3) |
| Financing cash flow | 295.2 | 278.0 |
| Cash and cash equivalents at year-end | 258.9 | 516.6 (US$74.2) |
| Restricted cash at year-end | 286.3 | 8.2 |
| Short-term debt at year-end | 1,049.0 | 99.9 (US$14.4) |
| Total assets / total liabilities | 1,402.7 / 1,161.7 | 991.4 / 298.6 |
| Shareholders’ equity | 241.0 | 692.8 |
2019 cash, cash equivalents and restricted cash totaled RMB524.8 million. The current portion of lease liabilities was RMB9.8 million, with a further RMB13.4 million non-current. The filing states management believed available cash and expected operating cash flows would cover ordinary working-capital and capital-expenditure needs for the next 12 months, while warning that additional financing might be needed.
Changes versus prior periods and unusual items
- Revenue fell 47.4% from 2018. Mining-machine sales volume declined to 487,052 units from 559,137, while average selling price fell to RMB2,826 per unit from RMB4,726. Computing power sold increased to 10.5 million Thash/s from 7.2 million.
- Bitcoin mining-machine average selling price fell to RMB131 per Thash from RMB369. Management attributed the decline and weaker demand mainly to Bitcoin-price movements.
- Gross profit of RMB508.1 million in 2018 turned to a gross loss of RMB516.0 million in 2019. The company recorded RMB729.0 million of inventory and supplier-prepayment write-down provisions in 2019, partly offset by RMB589.5 million of realized write-downs recognized in cost of revenue. 2018 included RMB786.0 million of write-down provisions.
- G&A expense rose 137.0% to RMB347.6 million, principally due to RMB247.4 million of share-based compensation, including expense related to shares acquired by employee-shareholders below appraised fair value. Total share-based compensation was RMB270.2 million.
- AI product revenue was RMB2.6 million, up from RMB0.3 million in 2018, but remained a small portion of sales. Lease revenue, newly introduced in July 2019, was RMB24.5 million.
- Operating cash outflow widened to RMB280.1 million. Financing included RMB669.6 million from share issuance and RMB544.1 million net IPO proceeds; the IPO raised US$90 million gross and approximately US$78.5 million net. Approximately 20% of net proceeds had been used by year-end.
- Management reported a 2019 foreign-exchange gain of RMB6.8 million, other income of RMB25.1 million (primarily government grants), and VAT refunds of RMB1.3 million, down from RMB110.2 million in 2018.
Outlook, risks and contingencies
- Bitcoin exposure: Results depend substantially on Bitcoin prices, mining economics, network difficulty, power costs and the May 2020 halving. The company reported demand and pricing pressure in early 2020 and warned of further inventory and prepayment write-downs if conditions deteriorated.
- COVID-19: The company reported lower product demand and pricing in the first months of 2020. It expected adverse, potentially material effects but said it could not estimate the full-year impact.
- Supply and geographic concentration: The PRC generated 74.8% of 2019 revenue. TSMC supplied 58.3% of procurement value in 2019; reliance on a small number of foundries and production partners creates capacity, pricing and disruption risks.
- Strategy: Management intends to expand AI and other applications, invest in R&D, and pursue overseas sales. AI adoption and diversification remain uncertain; management gave no numerical financial guidance.
- Legal and operating matters: Two putative securities class actions filed in March 2020 allege IPO-registration-statement misstatements and omissions. The company said the cases were preliminary, it would defend them, and losses could not be reasonably estimated; no liability was recorded. The Hebei assembly plant is on property whose landlord lacked required planning approval, creating possible relocation risk.
- Controls and governance: Management said disclosure controls were ineffective at year-end 2019 and identified two material weaknesses: insufficient qualified U.S. GAAP/SEC-reporting personnel and lack of documented close procedures. Nangeng Zhang held 72.6% of voting power through the dual-class structure. The company reported no dividends planned for the foreseeable future.
- Other investor risks: The filing discusses PRC regulatory, foreign-exchange and fund-transfer restrictions; limited PCAOB inspection access to the auditor in China; and limited insurance coverage. The company also disclosed that it was unable to estimate potential losses from the lawsuits.
Most important facts for investors to verify
- Whether mining-machine demand, pricing and gross margins recovered after year-end, and whether further inventory or prepayment impairments were recorded.
- Cash generation, working-capital needs, debt repayment and availability of financing following the reported operating cash outflow.
- How much IPO proceeds remain and whether proceeds are being used as described.
- Progress in remediating the two material weaknesses and whether subsequent filings report effective controls.
- Developments in the securities lawsuits and the assembly-plant property approval or relocation issue.
- Whether AI revenue and international sales are growing enough to reduce reliance on Bitcoin mining products and PRC customers.