Canaan(CAN) - 2022 Q4 - Annual Report

PART I ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS This section is not required for this report - This item is not required to be filled in this annual report[17] ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE This section is not required for this report - This item is not required to be filled in this annual report[17] ITEM 3. KEY INFORMATION This section outlines the company's holding structure, operational and legal risks in PRC, regulatory requirements, cash flow mechanics, and detailed risk factors - Canaan Inc. is a Cayman Islands holding company, with all operations conducted through its operating subsidiaries, meaning investors purchase equity in the holding company, not the operating subsidiaries[18] - The company faces significant risks related to PRC regulations, including those concerning overseas offerings, foreign investment, virtual currency, cybersecurity, and data privacy, which could materially impact operations and ADS value[18] - Under the Holding Foreign Companies Accountable Act (HFCAA), the company's ADSs could be delisted if its China-based auditor cannot be inspected by the PCAOB for two consecutive years, though PCAOB inspections in 2022 mitigated immediate risk[18][200][206] - Canaan Inc.'s ability to pay dividends depends on distributions from its PRC subsidiaries, which are subject to PRC regulations on retained earnings and statutory reserve funds, with no dividends paid by PRC subsidiaries to the holding company in 2020, 2021, or 2022[27][29] D. Risk Factors This subsection details the principal risks facing the company, including Bitcoin price volatility, market dependency, AI expansion challenges, supply chain vulnerabilities, and evolving regulatory landscapes - The company's results are significantly impacted by Bitcoin mining's economic returns, with price volatility adversely affecting demand and pricing for mining machines, potentially leading to inventory write-downs, such as the RMB 629.4 million write-down in 2022[46][48] - A significant portion of revenue, 94.8% in 2022, comes from Bitcoin mining machines, and the business would be materially harmed if this market diminishes[50] - The company faces risks in its expansion into the AI market, where AI revenue remains small at RMB 9.3 million in 2022, and failure to penetrate this market could adversely affect growth prospects[52][53] - As a fabless IC design company, Canaan depends on a limited number of third-party foundry partners, with purchases from three major partners accounting for 76.2% of total procurement in 2022, and insufficient foundry capacity could significantly delay product shipments[77][78] - The company is subject to PRC government crackdowns on Bitcoin mining and trading, with regulations deeming cryptocurrency-related activities illegal and classifying mining as an "obsolete industry," potentially harming the market for its products[61] - The company's ADSs may be delisted under the HFCAA if the PCAOB is unable to inspect its China-based auditors for two consecutive years, though inspections were conducted in 2022, future inability remains a risk[42][200][206] ITEM 4. INFORMATION ON THE COMPANY This section provides a comprehensive overview of Canaan Inc., detailing its history, business model as a fabless IC designer for Bitcoin mining and AI, product lines, and organizational structure A. History and Development of the Company Founded by Mr. Nangeng Zhang, the company shipped the world's first ASIC-based Bitcoin mining machines in 2013, completed its Nasdaq IPO in 2019, and expanded globally - The company was founded by Mr. Nangeng Zhang and his team, shipping the world's first batch of ASIC-based mining machines in January 2013 under the Avalon brand[281] - Canaan Inc. completed its initial public offering (IPO) on the Nasdaq Global Market on November 21, 2019, issuing 10 million ADSs at US$9.00 per ADS for gross proceeds of US$90 million[283] - In April 2022, the company entered into an at-the-market (ATM) offering agreement to sell up to US$750 million in ADSs, with no sales made under this offering as of December 31, 2022[284] B. Business Overview Canaan operates as a fabless IC designer, primarily selling Bitcoin mining machines, expanding into AI, and initiating Bitcoin mining operations as a secondary business line - Canaan operates as a fabless IC designer, focusing on proprietary high-performance computing ASICs for Bitcoin mining machines and AI solutions[286][291] - The company has expanded into Bitcoin mining operations as a second business engine, with revenue from this segment growing from nil in 2020 to RMB 218.6 million in 2022[287] - Due to adverse PRC regulations, the company has shifted its customer base internationally, with sales to customers outside the PRC accounting for 97.2% of total Bitcoin mining machine revenue in 2022, up from 16.0% in 2020[302][304] - As of December 31, 2022, the company's R&D team comprised 292 members, representing 54.0% of total employees, and held 205 patents, 117 software copyrights, and 71 IC layout-design rights[307][309][324] C. Organizational Structure Canaan Inc. is a Cayman Islands holding company operating through wholly-owned subsidiaries in Hong Kong, Singapore, the United States, and various PRC cities for R&D, assembly, and distribution Principal Subsidiaries and Activities | Name of Subsidiary | Place of Incorporation | Equity Interest | Principal Activities | | :--- | :--- | :--- | :--- | | Canaan Creative (HK) Holdings Limited | Hong Kong | 100% | Research and development of ICs | | Hangzhou Canaan Intelligence Information Technology Co., Ltd. | Hangzhou, China | 100% | Research and development of ICs | | Canaan Creative Co., Ltd. | Beijing, China | 100% | Research and development of ICs | | Langfang Creative Technology Co., Ltd. | Langfang, China | 100% | Assembly of mining equipment and spare parts | | Canaan Creative Global Pte. Ltd. | Singapore | 100% | International headquarters, R&D, international distribution | | Canaan U.S. Inc. | United States | 100% | International distribution, mining business | | Canaan Creative International PTE. Ltd. | Singapore | 100% | Mining business | ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section analyzes Canaan's financial performance, condition, and key influencing factors, including revenue, cost structures, operating expenses, liquidity, capital resources, cash flow, and critical accounting estimates A. Operating Results This subsection details the company's financial performance, noting a 12.2% revenue decrease in 2022 due to lower Bitcoin mining machine sales and a significant inventory write-down, contrasting with strong 2021 growth Consolidated Results of Operations (RMB in millions) | Metric | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | | Total Revenues | 447.7 | 4,986.7 | 4,378.9 | | Cost of Revenues | (409.9) | (2,136.0) | (2,831.1) | | Gross Profit | 37.8 | 2,850.7 | 1,547.8 | | Income/(loss) from operations | (253.9) | 1,828.3 | 304.7 | | Net income/(loss) | (215.1) | 2,000.3 | 486.3 | Revenue Breakdown by Source (RMB in millions) | Revenue Source | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | | Products revenue | 427.5 | 4,956.9 | 4,159.6 | | Mining revenue | — | 21.7 | 218.6 | | Leases revenue | 19.0 | 7.6 | — | | Total Revenues | 447.7 | 4,986.7 | 4,378.9 | - In 2022, the company recorded an inventories write-down, prepayment write-down, and provision for reserve for inventory purchase commitments totaling RMB 629.4 million due to low demand and prices in the Bitcoin mining machine market[433][454] - Revenue in 2022 decreased by 12.2% from 2021, primarily due to a reduction in total computing power sold from 22.3 million Thash/s in 2021 to 15.1 million Thash/s in 2022[453] - Revenue in 2021 increased by 1,013.9% from 2020, driven by a significant increase in both total computing power sold (from 6.6 million to 22.3 million Thash/s) and the average selling price per Thash/s (from RMB 63 to RMB 220)[465] B. Liquidity and Capital Resources As of December 31, 2022, the company held RMB 707.3 million in cash, with 2022 net cash used in operating activities at RMB 1,696.7 million, primarily due to inventory increases and decreased contract liabilities Summary of Cash Flows (RMB in millions) | Cash Flow Activity | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | 42.3 | 1,438.9 | (1,696.7) | | Net cash from investing activities | (49.6) | 5.1 | (30.3) | | Net cash from financing activities | (111.9) | 905.8 | (365.5) | | Cash at end of year | 395.8 | 2,731.7 | 707.3 | - Net cash used in operating activities in 2022 was RMB 1,696.7 million, primarily driven by a RMB 1,559.1 million increase in inventories and a RMB 1,386.1 million decrease in contract liabilities[480] - Net cash used in financing activities in 2022 was RMB 365.5 million, mainly due to payments for repurchase of ordinary shares (RMB 234.3 million) and warrants (RMB 44.3 million)[483] - Capital expenditures were RMB 2.2 million, RMB 37.7 million, and RMB 95.1 million in 2020, 2021, and 2022, respectively, for purchasing equipment and software[486] ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section introduces the company's leadership, details their compensation, outlines board practices and share incentive plans, and provides share ownership information - The board consists of five directors, including Chairman and CEO Nangeng Zhang and four independent directors[503][517] - In 2022, the aggregate cash compensation paid to directors and executive officers was RMB 27.0 million (US$3.9 million)[511] - The company has an Amended and Restated 2018 Share Incentive Plan, under which 299,179,140 restricted share units and 114,000,000 share options have been granted as of December 31, 2022[516] - Chairman and CEO Nangeng Zhang beneficially owns 100% of the Class B ordinary shares, representing approximately 65.3% of the company's aggregate voting power as of December 31, 2022[129][532] ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS This section refers to Item 6.E for major shareholder details and confirms no related party transactions or interests of experts and counsel - Information on major shareholders is detailed in Item 6.E of the report[534] - The company reports no related party transactions[536] ITEM 8. FINANCIAL INFORMATION This section directs readers to Item 18 for financial statements, reiterates legal proceedings, outlines the dividend policy, and confirms no significant changes since the audited financial statements - The company has not declared or paid any dividends since its inception and intends to retain future earnings for business operation and expansion[538] - As a holding company, its ability to pay dividends depends on distributions from its PRC subsidiaries, which are subject to local regulations regarding profit distribution and statutory reserves[541] - The company has not experienced any significant changes since the date of its audited consolidated financial statements included in the annual report[542] ITEM 9. THE OFFER AND LISTING This section confirms the company's ADSs are listed on Nasdaq under "CAN", with each ADS representing 15 Class A ordinary shares, and notes other subsections are not applicable - The company's ADSs have been listed on the Nasdaq Global Market since November 21, 2019, under the ticker symbol "CAN"[543] - Each ADS represents 15 Class A ordinary shares of the company[543] ITEM 10. ADDITIONAL INFORMATION This section covers supplementary corporate information, including memorandum and articles of association, material contracts like ATM offering and warrant repurchase agreements, and a summary of tax implications in the Cayman Islands, PRC, and United States - In April 2022, the company entered into an at-the-market (ATM) offering agreement allowing for the sale of up to US$750 million in ADSs[548] - In June 2022, the company repurchased over 4.72 million outstanding warrants for approximately US$6.61 million, which were originally issued in May 2021[549] - The company is not subject to income or capital gains tax in the Cayman Islands; however, if deemed a PRC resident enterprise, it could face a 25% EIT on worldwide income, and dividends to non-PRC shareholders could be subject to a 10% withholding tax[552][553] - The company believes it was not a Passive Foreign Investment Company (PFIC) for the 2022 taxable year, but notes this determination is made annually and is subject to change[568] ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section details the company's exposure to market risks, including foreign exchange risk, interest rate risk, and credit risk, and how they are managed - The company faces foreign exchange risk as its business is effectively denominated in Renminbi (RMB), while its ADSs are traded in U.S. dollars, and fluctuations in the RMB/USD exchange rate can affect the value of investments in ADSs[591][592] - Interest rate risk is not currently considered material, but future investments in interest-earning instruments could be exposed to fluctuations in interest rates[595] - Credit risk is managed by placing cash with high-credit-rated financial institutions and performing customer credit evaluations, generally without requiring collateral[596] ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES This section primarily addresses the company's American Depositary Shares (ADSs), identifying The Bank of New York Mellon as depositary, detailing ADS representation, and outlining associated fees and expenses - The Bank of New York Mellon acts as the depositary for the company's American Depositary Shares (ADSs)[597] ADS Holder Fees and Expenses | Fee | For | | :--- | :--- | | $5.00 (or less) per 100 ADSs | Issuance or cancellation of ADSs | | $0.05 (or less) per ADS | Any cash distribution | | $0.05 (or less) per ADS per calendar year | Depositary services | | Registration or transfer fees | Transfer of shares to or from the depositary | | Taxes and governmental charges | As necessary (e.g., stock transfer taxes, withholding) | ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES The company reports no defaults, dividend arrearages, or delinquencies - The company reports that there have been no instances of defaults, dividend arrearages, or delinquencies[604] ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS This section confirms no material modifications to security holder rights and details the full utilization of approximately US$78.5 million in net IPO proceeds for supply chain optimization, R&D, business expansion, and debt repayment - The net proceeds of approximately US$78.5 million from the November 2019 IPO have been fully utilized as of December 31, 2022[604] - Approximately US$73.7 million of the IPO proceeds were used for supply chain optimization, R&D improvements, business expansion, and debt repayment, with the rest allocated to general corporate purposes[605] ITEM 15. CONTROLS AND PROCEDURES This section addresses the company's internal controls, confirming the effectiveness of disclosure controls and internal control over financial reporting as of December 31, 2022, and noting the remediation of prior material weaknesses - Management concluded that as of December 31, 2022, the company's disclosure controls and procedures were effective[607] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO 2013 framework[610] - Material weaknesses identified in 2020 and 2021 related to insufficient U.S. GAAP expertise and lack of documented closing procedures have been remediated as of December 31, 2022[611][612] ITEM 16A-16J. Corporate Governance and Other Disclosures This section covers corporate governance and disclosures, including the audit committee financial expert, code of ethics, principal accountant fees, share repurchase programs, and HFCAA status - The Board of Directors has identified independent director Yaping Zhang as the audit committee financial expert[615] Principal Accountant Fees (RMB in thousands) | Fee Type | 2021 | 2022 | | :--- | :--- | :--- | | Audit Fees (PwC) | 1,946 | 1,074 | | Audit Fees (KPMG) | 7,160 | 13,500 | | Audit-Related Fees | — | 965 | | Tax Fees | 657 | 330 | | Total | 9,763 | 15,869 | - The company announced a share repurchase program of up to US$100 million in March 2022; as of March 31, 2023, 14,339,826 ADSs had been repurchased, with approximately US$72.9 million remaining available[623] - On September 9, 2021, the company dismissed PricewaterhouseCoopers Zhong Tian LLP (PwC) and engaged KPMG Huazhen LLP as its independent registered public accounting firm[624] PART II ITEM 17 & 18. FINANCIAL STATEMENTS This section indicates the inclusion of full audited consolidated financial statements for 2020, 2021, and 2022, along with accompanying notes and reports from independent registered public accounting firms - The report includes audited consolidated financial statements for the years ended December 31, 2020, 2021, and 2022[634][639] - The financial statements for the years ended December 31, 2021 and 2022 were audited by KPMG Huazhen LLP, while those for the year ended December 31, 2020 were audited by PricewaterhouseCoopers Zhong Tian LLP[641][649] ITEM 19. EXHIBITS This section lists the exhibits filed as part of the annual report, including the Amended and Restated Memorandum and Articles of Association, ADS Deposit Agreement, and Share Incentive Plan - Key exhibits filed with the report include the company's Amended and Restated Memorandum and Articles of Association (Exhibit 1.1), the ADS Deposit Agreement (Exhibit 2.1), and the Amended and Restated 2018 Share Incentive Plan (Exhibit 4.1)[635]