Canaan you believe this crypto stock got listed on the Nasdaq?

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In November, Chinese bitcoin mining-machine manufacturer Canaan Creative became the first crypto company to be listed on the Nasdaq, at a valuation of $1.35bn.

After the IPO-that-never-was of Bitmain, another Chinese bitcoin mining firm that has been trying to go public since 2018, the successful listing of Canaan on a major US stock exchange was heralded by the crypto industry as something of a coup. This despite the fact that the $90m the company raised was a fraction of its original $400m target. See for instance this tweet by Justin Sun (the dude who Warren Buffett was recently made to dine with after he bid just over $4.5m for the privilege):

The party appears to have been a little premature, however.

In the three months or so since listing, the Cayman Island-registered company — which is one of the world’s largest manufacturers of the ASIC devices that are used to “mine” cryptocurrency — has seen its share price collapse by almost half, from $9 to around $4.70 at pixel time (despite a rather unusual 80 per cent one-day surge in the middle of last month). And that’s in a period during which bitcoin has climbed about 15 per cent.

But the collapsing share price is just the start of the company’s woes.

Bear with us as we tell you a strange tale of how it came to be that this little-known Chinese crypto firm came to be listed on the second-biggest stock exchange in the world, despite three unsuccessful listing attempts in Asia, and is now being sued by unhappy investors. 

On Wednesday an investor in Canaan named Phillippe Lemieux filed a class-action lawsuit against the company, alleging that it had released false and misleading statements to make its financial health appear better than it was, and had failed to disclose information that might have been pertinent to investors. And a host of law firms have announced investigations into similar claims of securities laws violations by Canaan over the past couple of weeks.

This all comes on the back of a February 20 note from short-seller Marcus Aurelius Value (MAV), entitled “Canaan Fodder”, which goes into some rather disturbing details about the company’s antics in the run up to the Nasdaq listing, and also its three previous unsuccessful listing attempts.

Canaan told us they were unable to provide any comment for this article as it was too close to their fourth-quarter earnings release. Instead, they directed us to an article on Chinese blockchain-focused site, which constitutes of a series of rebuttals to the MAV short report. It’s in Mandarin, but we’ve used Google to give us a clunky translation, and will include some of this in order to try to put across Canaan’s point of view in this post.

From the MAV note (with our emphasis):

We view CAN as the latest US-listed Chinese company to have deceived investors about its business. After failing three times to list itself on Asian exchanges since 2016, CAN took advantage of these frothy markets to complete a NASDAQ IPO in November 2019. Shares surged by more than 80% in a single trading day last week, pushing the company’s market cap above $1 Billion, in a move that appears to have enticed thousands of unsuspecting retail investors into the speculative fervour. But our investigation of this bitcoin mining machine maker reveals undisclosed related party transactions, irregularities involving many customers and distributors, as well as a business model that we view as broken. Regardless of your outlook on the future of Bitcoin, we believe that CAN’s business is simply far worse than promoted. We therefore see significant downside potential and believe the stock is uninvestible.

So let’s look into some of these allegations.

The first concerns alleged undisclosed related party transactions. In late October, around three weeks before the Nasdaq listing, Canaan announced a “strategic partnership” with a small Cayman Island-incorporated, Hong Kong-listed company called Grandshores, with the latter agreeing to spend up to $150m on buying and distributing Canaan equipment on behalf of the company by the end of 2020.

That $150m is nearly equal to Canaan’s 12-month trailing revenue of around $177m, as MAV points out, so this would seem like kind of a big deal for the company. But it’s also more than three times greater than Grandshores’ market capitalisation, four times Grandshores’ reported 2019 revenues, and almost ten times the amount of cash the Hong Kong company says it has on hand. So how could Granshores afford to spend this $150m? What was going on?

It turns out that Grandshores’ chairman and executive director, Yao Yongjie, is a shareholder in Canaan, owning 9.7 per cent of the company’s outstanding shares, according to an SEC filing. But this transaction isn’t listed in the SEC filings, so the relationship is not acknowledged. MAV says it views the Grandshores announcement as “largely bogus”, and that it “was used by CAN as a device to hype its financial prospects to investors”.

We got no reply to our request for comment on this from Grandshores, but the Huiyep article says the relationship did not need to be disclosed as it “did not meet the related party standards required by the US financial accounting standards”. It also says the $150m deal “was only an intent, not an ongoing or completed transaction, and had no impact on the operating results during the reporting period” and there was therefore no need to disclose it. (Grandshores did, however, feel the need to disclose it as a related party dealing, in its filings in Hong Kong.)

Similar apparent related party transactions appear to have been used to boost investor interest in the run-up to Canaan’s attempts to list on Chinese exchanges.

You also have the fact that some of the companies listed as major customers of Canaan in its Chinese listing documents seem to be operating in industries that are entirely unrelated to crypto mining.

According to MAV, one of among the top-five accounts receivable listed by Canaan in 2015 to 2017 was a firm called Tianjin Garments Import & Export Co. The clue is in the name: the company says on its website that it specialises in “clothing, fabrics, blankets, carpets and stone carvings”.

“Fashing”! © Screenshot from Tianjin Garments website 

The Huiyep article says on this (excuse the clunky translation) that Canaan “borrowed (Tianjin’s) import and export qualifications to export a mining machine to a Swedish customer. The initial payment was still the advance payment of Tianjin Clothing”.


Then there are the disappearing distributors. Shortly before its IPO, Canaan deleted 8 of the 11 official distributors it had previously listed on its website (MAV links to the a May 2019 version of the website as archived by the waybackmachine). One of these was a company called Nova Bit Mining Solutions, which at least sounds like it might be into crypto mining.

The intriguing thing here, though, is that the CEO of Nova Bit, according to his LinkedIn profile, is Andres Romero, and he is… one of Canaan’s sales reps. He happily lists both companies on his LinkedIn profile:

We contacted Romero on this, and he told us that he no longer worked for Nova Bit and that he just hadn’t got round to updating his LinkedIn profile. He also said he had “no idea” who the new Nova Bit CEO was or whether the company was still operational. Like MAV, we made several calls to the number listed on the Nova Bit website and didn’t get through.

There appears to have been some further issues regarding the distributors, too. MAV say their review of the other seven deleted distributors reveals that “most appear to be small, defunct, or otherwise incapable of buying material amounts of product from CAN”.

The other company you can see Romero currently works for, on his LinkedIn is Northern Data, which last week announced a “close cooperation” with Canaan “in the areas of Artificial Intelligence (AI) development, Blockchain Technology and Datacenter operations”. Canaan’s other listed sales agent, Matthew Carson, works for the same company, according to his LinkedIn profile. Cryptoland: it’s all so cosy.

Another slightly odd matter, given the fees associated with such transactions, is that shortly before Canaan’s November 20 listing on the Nasdaq, its lead underwriters Credit Suisse pulled out of the IPO. We asked Credit Suisse to tell us the reason for the sudden change of heart but the bank declined to comment.

There’s much more to dig into here, and the full short report — which has not provoked any direct response from the company — is worth a read.

We will certainly continue to keep a close eye on this firm. With this much smoke, there has to be some Canaan fire.

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