Canaan Inc.

Ladies and gentlemen, thank you for standing by and welcome to Canons Inc's first quarter 2023 earnings conference call. At this time, all participants are in listen-only mode. After the management's prepared remarks, we will have a question and answer session. Please note that this event is being recorded. Now, I'd like to hand the conference over to your speaker host today, Mr. Clark Susie, Investor Relations Director of the company. Please go ahead, Clark.

Thank you. Hello everyone and welcome to our earnings conference call. The company's financial and operating results were released by Newswire Services earlier today and are currently available online. Joining us today are our Chairman and CEO, Mr. Nan-Gung Jung, and our CFO, Mr. Jin-Chung James. In addition, Mr. Leo Wang, IR Senior Director, and Ms. Shi Zhang, IR Manager, will also be available during the question and answer session. Mr. Zhang will start the call by providing an overview of the company and performance highlights for the quarter. Mr. Chung will then provide details on the company's operating and financial results for the period before we open the call up for your questions. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release. Today's call will include forward-looking statements. These statements include, but are not limited to, our outlook for the company and statements that estimate or project future results of operations or the performance of the company. These statements speak only as of the date hereof and the company assumes no obligation to revise any forward-looking statements that may be made in today's press release, call, or webcasts, except as required by law. These statements do not guarantee future performance and are subject to risks, uncertainties, and assumptions. Please refer to the press release and the risk factors and documents we file with the Securities and Exchange Commission, including our most recent annual report on Form 20F for information on risks uncertainties, and assumptions that may cause actual results to differ materially from those set forth in such statements. In addition, during today's call and webcast, we will discuss both GAAP financial measures and certain non-GAAP financial measures, which we believe are useful as supplemental measures of the company's performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release, which is posted on the company's website. With that, I will now turn the call over to our chairman and CEO, Mr. NG Jung. Please go ahead.

Hello, everyone. I'm NG, the CEO of Canaan. Thank you for joining our conference call. James and I are at the company's headquarters in Singapore, sharing the corporate report of the conference call with you. Compared to Q4 of previous year, Q1 of 2023 has brought more hope to Bitcoin mining industry. Although the Bitcoin price still fluctuates, it has generally stepped out of the bear market and shown an upward trend. The confidence of miners has gradually recovered, and coupled with the traditional peak season in the first quarter, there are signs of a revival in purchasing demand. Although the purchasing power of large miners is still limited by cash flow, pace of facility construction and the financing environment. This has not affected the positive trend of the market. Regardless, the selling price in the mining machine market is still declining, and the first quarter is still in a bear market state. In this ever-changing market environment, we believe that maintaining strategic continuity and timely adjusting tactical decisions according to market dynamics are equally important. In other words, we need to keep investing in business and assets that bring long-term value while also carefully handling our company's balance sheet. I would like to introduce to investors the four strategic focuses that we have been concentrating on. and our actions in this area. First, we insist on long-term R&D and production capacity investment. Second, we continue to develop and improve our multi-faceted sales system to connect and assist global customers. Third, we adhere to our own mining strategy, overcome difficulties, and continue to expand mining deployment. Finally, we maintain a solid balance sheet and accumulate valuable assets with great potential. I will elaborate on these four points one by one. Firstly, we are committed to R&D and production capacity. Product development and capacity assurance remain our major input and investment in the first quarter of 2023. The specific data will be shared by James later. As a technology and product-oriented company, the importance of product power in our industry is self-evident. We always put product development first. As mentioned in the last financial report, our latest generation A13 series mining machine was introduced in the industry's winter in late October last year, we insisted on maintaining close cooperation with upstream foundries, mass-produced in the first quarter, and further improved the yield and computing power efficiency through technical adjustments and process improvements. Our A13 series has reached and exceeded our previous design and expectations in terms of yield rate and actual performance. In the first quarter, we have achieved stable supply. In actual use by customers, the excellent computing power consumption and the quality of A13 series has also been recognized, and the shipment volume has grown rapidly. Whether in a bear market or a wool market, we always insist on intuition and strive to make the best mining machines. Even when A13 series was not yet mass-produced and the market was at its most bearish, our new product development was always in full swing. We are well aware that the market requires the performance of mainstream products to take a big step forward about every half a year. And we must keep up. And the continuous launch of new products often means continuous supply chain investment. In the first quarter, our mass production and investment in the supply chain exceeded $50 million. I believe that our efforts and resource input will pay off in the subsequent product performance improvement and supply chain stability. Secondly, we are dedicated to developing and enhancing our sales system to reach global customers. The industry we are in is fast growing and unpredictable. In each bear bull cycle, the industry undergoes reshuffling, with some miners leaving and new ones joining. As miners continually seek and develop standard chip energy worldwide, transforming wasted energy into reusable power, both the density and the location of miners are constantly changing. Starting from the first quarter of this year, we accelerated the construction, development, and the improvement of our comprehensive international sales system. Our sales system is now divided into three parts, large clients, channels, and retail. And it is assisted by online stores and original business developments, allowing us to better reach and convert customers worldwide. In the first quarter of 2023, the overall industry was affected by inventory, competition, financing conditions, and cash flow. Although sales volume in the mining machine markets saw a slightly recovery compared to Q4 of 2022, we still remain in a bear market with a continuous decline in average selling price of computing power. A series of small and medium-sized Bank failures in the U.S. late in the quarter also had some impact, causing delays in payment and shipment for some orders. These factors resulted in less than ideal sales revenue for this quarter. We achieved total sales of 4.22 million terabytes per second, a sequential growth of 126.8%, but the total quarterly revenue of $55 million was below our expectations. However, we also see positive aspects. Although demand from large clients in the US fluctuated, our expanding sales system quickly seized many sales opportunities in other regions. With the total number of purchase orders rising to over 500 in Q1, in the first quarter, We actively developed sales channels in Southeast Asia and established cooperation with local distributors in Thailand and Malaysia for the first time. Our online store targeting overseas retail customers attracted orders from about 20 countries, including first-time contacts in several countries such as Greece, the Netherlands, Argentina, Brazil, Mexico, and the Philippines. As we enter Q2 and the market storyline, the initiatives and efforts we implemented in Q1 are starting to show more results. For instance, we recently signed a contract order of 11,000 units of our A13 product with Cypher, a public we listed institutional mining clients in North America. Before that contract, we assisted the clients to conducting extensive on-site tests for our products at their mining set in Texas. The client ultimately recognized the excellent performance of our A13 series products under relative extreme weather conditions. Recently, We have also signed a series of large-scale contract orders for an additional 36,000 mining machines in other regions, which are expected to be delivered in succession before the end of the fourth quarter of 2023. The recent appearance of these large contract orders across multiple markets confirms that our business and product strategies are correct. Lastly, the return of contract sales orders will also help us improve our cash flow situation. Thirdly, we stick to our mining strategy and continue to expand our mining deployment. Since the company started mining operations in the second half of 2021, we have faced many challenges. Despite these, We have formally established mining as a strategy priority and secured a place for ourselves in the global, rapidly developing industry of Bitcoin mining. In the first quarter of 2023, the probability of mining improved due to recovery of Bitcoin prices, and some sites that were forced to shut down in the fourth quarter of 2022 were able to restart operations. This quarter, we produced 476 Bitcoins, contributing a mining revenue of 11 million US dollars, a slightly increase from the previous quarter and a new record high. We are continuously exploring more mining opportunities in different regions and reducing our comprehensive mining operation costs. Even though the total network computing power is still rising, The increase in Bitcoin price and the recent industry events like BRC20 have boosted mining income during certain periods. We anticipate that the company's mining income will reach a new high in the second quarter. As of March 31st, 2023, we have deployed computing power of over 5x hash per second to our mining sites. However, Due to severe cold weather and contract execution issues, the total power is installed is over 4 exahash per second. This figure is lower than our forecast in the previous quarter's financial report. We will continue to strive to improve our deployment, deployed computational power data with our cash flow and operational capabilities. Lastly, we are dedicated to maintaining a health cash flow and accumulating assets with strong growth potential. Canon has just completed a full decade from its inception in early 2013 to the first quarter of 2023. We've weathered many market ups and downs and have gained some unique experience in managing our balance sheet. In the first quarter of this year, our prediction about the price of Bitcoin was mostly accurate, but the sales of our mining machines proved to be more difficult. We achieved improvements in sales and the return of contract sales orders in the second quarter, which continued to contribute our revenue and cash flow. This also was noting that the healthiness The healthy and stable supply chain resources we accumulated over the years have helped us seize opportunities to mass produce and deliver mining machines as the price of Bitcoin rises. Meanwhile, our Bitcoin assets continue to grow. Once again, we exercise our strategy of holding Bitcoins. Bitcoins generated from mining are only used to pay for direct operation costs such as electricity. Our self-developed and self-produced mining machines products and the mining power deployed to the mining sites as important assets for producing Bitcoin contain huge growth potential as Bitcoin price continues to rise in the medium and long term. In some cases, already deployed mining machines can be resold with warranties. In this brand new industry, we are making history every day. Even for me, the first quarter of 2023 was a challenging start. The uncertainty in the reality has made our performance less than ideal. However, our direction has not divided significantly. Since the second quarter, Although the price of Bitcoin has not risen sharply, the company's operational results have been more positive, which is the result of the hard work of all KNN employees. However, we must also see that the current economic environment is not optimistic. The cloud of uncertainty still looms over us, and the price of Bitcoin may still continue to fluctuate. At least in the United States, the financing ability and the purchasing power of miners in large miners' farms have not yet recovered. Coupled with the current situation where the decision has not yet been completed, both sales prices and the gross profit will continue to be concentrated. The above comprehensive situation, we are extremely cautious about expectations for the second quarter of 2023. The revenue for the second quarter of 2023 is expected to be about 72 million US dollars. This forecast is based on the current market and operating conditions of the company. And the actual situation may vary. In the final section, I would like to share some new insights on my personal beliefs about decentralization and Bitcoin. We often hear doubts about the utility of Bitcoin. In fact, the use of Bitcoin is complementary in the development of new technologies, and its function as a medium of payment and value storage has never changed. Over the past 10 years, the two pieces of the puzzle leading to Web3 has been largely completed, namely blockchain-based digital currencies and the smart contract technology. In our last Earnings Core, someone asked me whether I think Bitcoin is a risk asset. I've thought more about this question since then. In the short term, Bitcoin, indeed, shows some characteristics similar to risk assets. But in the medium term, Bitcoin should be seen as a powerful hashing tool against system-based risk in the current global financing system. and even as a tool against global political and economic uncertainties. This isn't hard to understand. But in the long term, in the new information-driven world of Web3, blockchain-based digital currencies are likely to become mainstream applications and have broader prospects. Once, I had a long discussion with GPT-4 about the future of AGI becoming mainstream in the world. I'm almost certain that AGI will be the last piece of puzzle of Web3. The final creation of Web3 will be decentralized individually distributed AI system. At that time digital currency and smart contracts based on blockchain will reshape the financing system of the new world on the basis of consensus. Most trustworthy, efficient, transparent are greatly improving the level of productivity and promoting the process of the entire society. Today, we are a provider of computing power products and services in the blockchain industry. Going forward, I hope to further expand our technology and have the opportunity to participate in the broader changes in the future, bringing value to customers with computing power products and services, and to support the progress of society. This concludes my prepared remarks. Thank you, everyone. I will now turn the call over to our CFO, James. Thank you.

Thank you, MG, and good day, everyone. This is James speaking in our Singapore headquarters. Firstly, I would like everyone to notice that we have changed our reporting currency. Starting from January 1, 2023, we've decided to change our reporting currency from RMB, or so-called Chinese Yuan, to US dollars. The change of the reporting currency will better illustrate the results of our global sales and is another important step in our internationalization strategy. We have applied the change of reporting currency retroactively to our historical results of operations and financial statements. It will also be easier for our investors to read and analyze our financial reports in one currency. As NGS studied the COVID, the first quarter of 2023 was challenging due to the revised but still weak market demand and declining selling price. From company perspective, we are committed to maintaining our strategic continuity. We kept investing in R&D and production capacity. We developed and upgraded our sales system to reach global customers. We continued to expand our mining deployment, and we strived to maintain a healthy cash flow and accumulate assets with strong growth potential for our shareholders. Overall speaking, in quarter one, total revenue generated was $55.2 million, which did not meet our guidance of $65 million. The gap consisted of approximately $6 million in machine sales and $4 million in mining business. Let's begin by discussing our machine sales. Our revenue of mining machine cells was $43.7 million in this quarter, 7.6% lower than $47.3 million for the last quarter. In the first quarter of 2023, the industry was affected by inventory, competition, financing environment, and cash flow, and the average selling price of computing power continued to decline. We actually increased our sales volume in computing power, reaching 4.2 million terahash per second, with a substantial increase of 126.8% compared to Q4 last year. However, the average selling price dropped to $10 per terahash per second, as we needed to adjust our prices in line with the overall market for Bitcoin mining machines. Additionally, affected by a series of U.S. bank failure events in mid-March, payment and shipment of some orders have been delayed. After that period, we received more orders and recorded customer advances of $8.3 million at the end of March. This laid a good foundation for the machine sales revenue in the second quarter. Our gross profit for mining machine sales was $5.2 million, and our gross margin rate for mining machine sales was 11.9% in this quarter. Turning to our mining business, our mining revenue was 11 million USD in this quarter, 3.3% sequential increase compared to 10.7 million USD in Q4 last year. It's a new record high. However, this revenue did not meet our expectations. We temporarily shut down the machines at several mining sites during January due to low Bitcoin prices. We believe this was a necessary measure to minimize operating losses. This had an impact on the quarterly mining revenue results. In this quarter, our total deployed hash rates reached more than 5x hash per second, and our installed hash rates reached more than 4x hash per second. We mined 476 Bitcoins in this quarter and achieved 19.8 Bitcoins for mining profit. Gross profit was $0.2 million for our mining business in this quarter. Please notice here that mining profit or loss is defined as the proportion of mining revenue deducting costs for energy and hosting in terms of mining revenues without consideration of depreciation. Now talking about our AI business, we recorded 0.41 million US dollars for AI revenue in this quarter. It is 68.6% increase compared to 0.24 million US dollars for quarter four. The sequential revenue growth was mainly driven by the increased sales volume for AIoT customers. Switching to the expense, our R&D expenses stood at 19.1 million US dollars in this quarter, compared to 33.4 million US dollars in the last quarter and 15.2 million US dollars in the prior year period. The quarter-over-quarter decrease was due to the one-off expenditure for our new generation chips incurred in the last quarter. Excluding this one-off expenditure impact, our R&D expenses remained stable sequentially. The steady year-over-year growth reflected our continuing commitment to building our talented R&D team. Our sales and marketing expenses were 1.5 million U.S. dollars compared to 1.1 million U.S. dollars in the last quarter and 3.0 million in the prior year period. Sales commission reduced year over year because of revenue downsizing. Our general administrative expenses in this quarter were $17.6 million, compared to $24.6 million in the last quarter and $19.8 million in the prior year period. The decrease was mainly due to $2.6 million of realized gains on Bitcoin sold in this quarter for electricity costs. which offset our G&A expenses. Please note when we do disposal of Bitcoin, the gain or loss upon booking value will be recorded into G&As. The net result of the foregoing was an operating loss of $85.7 million for this quarter, which is 31.4% narrower than the last quarter. The net loss was recorded at $84.4 million, which is 8% narrower than the last quarter. It is important for us to keep our eyes on the cash flow. We held cash and cash equivalents of $72 million at March 31st. As our CEO shared, we committed to securing future production capacity during this quarter. We spent $53.9 million to secure wafer supply and machine production. Other cash payments included $28.6 million for operations and $4.7 million in the tax expenses. Please note that as we paid the year-end bonus in January, the outflow on operation was higher than usual round rate. The cash out, totaling $87.1 million, was net off by inflows of $54.8 million from sales and the proceeds of $3.1 million by the ATM facility. Turning our attention to our Bitcoin assets. We held 623 Bitcoins as of March 31st, decreased from 757 Bitcoins by the end of 2022. First, we mined 476 Bitcoins in this quarter. In order to reduce the effect of Bitcoin price fluctuation on the profitability of our mining business, we implemented a pre-exchange plan in this quarter. That is, at the beginning of each month, we would exchange Bitcoins to US dollars based on the current price in advance for the monthly electricity cost. This new process eliminated possible risks triggered from significant Bitcoin price fluctuations. In total, we exchanged 699 Bitcoins for the electricity cost in this quarter. This aforementioned resulted in a decline of 134 Bitcoin quarter over quarter. It is a one-time change. From March 7, 2023, the date we reported our financial results for the fourth quarter of 2022 to May 25, 2023, we utilized the ATM for a small amount of fundraising to test the financing facility. During the above period, we sold 1.5 million 32,219 ADSs with net proceeds of approximately 4.2 million US dollars at an average price of 2.73 US dollars per ADS. We executed the above sales within 10 trading days in March, and we did not utilize the ATM after March 31st. From March 7th, 2023, the date we reported our financial results for the fourth quarter of 2022 to May 25th, 2023, we did not purchase any ADS back. In future, we will prioritize our shareholders carefully monitor cash flows and stock prices, and effectively execute ATM or stock repurchase. In quarter two, we anticipated the revenue of $72 million, a 30% increase from quarter one. Despite the market's gradual recovery, we have secured some contract sales orders from major clients and distributors. This has bolstered our cash flow and allowed us to invest in strategic areas of focus. However, it is important to note that we operate in a dynamic market with uncertainties, so our estimation reflects our current perspective and understanding of the operation. Now, I would like to briefly walk you through our financial results for the quarter. Revenues in the first quarter of 2023 were $55.2 million as compared to $58.3 million in the fourth quarter of 2022 and $201.8 million in the same period of 2022. Gross loss in the first quarter of 2023 was $47.5 million, compared to a gross loss of $64.1 million in the fourth quarter of 2022, and a gross profit of $123.5 million in the same period of 2022. Total operating expenses in the first quarter of 2023 were $38.1 million, compared to $60.8 million in the fourth quarter of 2022 and $38.0 million in the same period of 2022. Loss from operations in the first quarter of 2023 was $85.7 million, compared to a loss from operations of $125.0 million in the first quarter of 2022, and an income from operations of $85.4 million in the same period of 2022. Net loss in the first quarter of 2023 was $84.4 million, compared to a net loss of $91.6 million in the fourth quarter of 2022, and a net income of $65.1 million in the same period of 2022. Basic and diluted net loss per ADS in the first quarter of 2023 or US$0.51. As of March 31, 2023, the company had cash and cash equivalents of US$72.0 million. This concludes our prepared remarks. We are now open for questions.

Thank you. We will now begin the question and answer session. As a courtesy to other investors and analysts who may wish to ask a question, please limit yourself to two questions at a time. If you have any follow-up questions after the Q&A session, the investor relations team will be available after the call. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your questions in English. To ask a question, please press star 11 on your telephone and wait for a name to be announced. To cancel your request, please press star 1 1. There will be a short silence while questions are being collected. One moment for the first question. We have the line. Your first question today comes from the line of Kevin Dede from HC Wainwright. Please go ahead.

Thank you very much for taking my question. I was wondering if you might be able to offer a self-mining hash rate target for the year, maybe disclose a little bit on what you're seeing in terms of the availability of hosting sites. And then secondly, I was hoping you could share a little bit more geographic information on equipment sales. It's very comforting to see that sales are growing outside of North America. And I was wondering if you might be able to segment sales from Asia, North America, and European framework. Thank you very much.

Oh, oh.

As we mentioned, as of March 31st, the deployed computing power at our mining farms exceeded 5x hash per second. However, in the first quarter, the installment of computing power was lower than expected due to weather conditions and the contract execution issues, resulting in total installed hash rate was over 4x hash per second. In the second quarter, we entered into a mining partnership with Stronghold in early May, which involved 4,000 mining machines with a total capacity of At the same time, we are also exploring more mining partnership opportunities in regions with abundant energy resources around the world. Our mining business has expanded into many geographical regions where we had no previous The local practical, economic, and infrastructure conditions in these areas are complex and subject to change, which pose challenges to our explanation and development efforts. This further tests our team's operational capabilities and ability to adapt to changes. Therefore, we have a more conscious outlook on mining expansion. We currently estimate that the installed mining hash rate in Q2 will be around the 4.5x hash. This forecast is based on the current operating conditions, and the actual situation may be different. Mining is a long-term strategic focus for us, and as it complements our mining machine sales business and allows for the effective utilization of more inventory, we will actively and prudently collaborate opportunities negotiate the terms of cooperation and strive to continuously increase the installed mining hatchery to generate Bitcoin mining capital.

I will take the second question from Kevin. It's about the geographical situation of the mining industry. I think the leading market is still United States, but it looks like the inventory, no matter new machines or second hand machines, are still quite sufficient inside the you know, the whole North America market. So it looks like the more opportunities come from Southeast Asia, Middle East, and even South America market. And we noticed some retail, you know, customers are ordering machines even from Africa and from, you know, West Europe. I think Depends on the energy of the local level usage. I think that the mining business will grow as we expected to global level and more and more areas will join this mining business. And it will rapidly change because of different locations may have different regulations coming out related to mining. But from our perspective, we would like to see all kinds of opportunities Especially like in this quarter, we had the connection with Malaysia and Thailand distributor, which enabled us to touch the customers locally in those two countries. We will develop more, as CEO said, build up our sales channels to make sure we get in touch with our customers locally. would like to continue the dialogue with big clients in North America. Cyber is just a beginning of us, so we have confidence to discuss more customers, discuss with more customers, and let them enjoy the A13 series machines for their mining purpose. So I hope that answers your question, Kevin.

Yes, so phenomenal. I really appreciate the detail. I hear great things about the A13, but I cannot leave the call without hearing from NZ what Bitcoin price is going to be this year.

Okay, I think...

In short term, I think we have no need to do mid-term or long-term prediction of Bitcoins. But for short term, I think the Bitcoin price is related to the economic environment, especially for US. So I think you know the answer.

I think you know the numbers. Yeah.

We hope to have you arrive in the second half of this year.

Thank you very much, gentlemen. I appreciate the opportunity to ask questions. Thank you very much.

Thank you. One moment for the next question. Next, we have the live from Shuang Sun from Guoshan Securities. Please go ahead.

Hello, can you hear me?

Yes.

Oh, yes.

Hello, Andy. Hello, James. I would like to know about the new progress of the company's AI edge computing chip and application scene. Because everyone knows that the entire capital market has been very concerned about AI in the past few months. And then the company just happened to have this business. So I want to ask them, please introduce the new progress and application scenarios of the company's AIH computing chips.

Okay.

Recently, the AI industry represented by products like ChessGPT has revealed an important part. I think the reason why the AI industry has not developed as expected over the years is not due to AI itself. But rather, like many other industries, it is the result of a contradiction between the users' expectations for the product capabilities and what the industry can provide at a certain cost. When AI products can truly bring significant benefits to users, then you see the result. The response is very positive. Therefore, I'm currently restructuring the company's AI department and business to ensure that our technology and investments can embrace future of AGI, artificial general intelligence. I mean world in the short to medium. But in the short to medium term, we believe that an important function of AIoT and Edge AI is to convert real world like images, sounds, and sensor data into text and code. or code information that can be understood by large-language models like JetGPT. While complex decision-making is not a strength for HCI today, this is where large-language models excel. Our K230 chip has highly efficient HAI capabilities and advantages in terms of low cost and low power consumption. Therefore, we are adjusting the direction of our product applications to adapt to this trend. In the long run, as I mentioned in the CEO remarks, I will explore ways to horizontally expand our technology and participate in future and broader transformations. We aim to bring value to our customers through more general-purpose computing power, products, and services, and support society progress. Thank you. Thank you.

我们也觉得AI算力跟加密财务挖矿挺像的,就是都是投入电力跟算力,然后获得就是回报。 那我的第二个问题是,最近因为Audino跟B2C20比特币网络上的交易费用比较高,公司的挖矿业务, Is there any upside to the company's mining business going forward due to the very high transaction fees?

I think according to Satoshi Nakamoto's vision, transaction fees will become an important compliment for miners' income after multiple halvings. It appears that the industry is developing as expected. So recently, due to events like BRC20, the increase in Bitcoin transaction fees has been beneficial for both miners and our own mining business. In a situation where the network's total computing power remains constant, miners can earn more mining fees. So we hope that miners and ourselves can improve our financial situation and that our customers can recover their processing power more quickly. Thank you.

The third question is, will the company consider selling these Bitcoins as the company has a growing supply of Bitcoins on your balance sheet? What is your strategy for potentially selling them?

Currently, we do not have any plans to sell our Bitcoins. And there are several reasons for that. Firstly, our mining operations are still in the early stages of scaling up, so we have been focused on the development. You may notice that we do sell mine Bitcoin to cover our mining facilities electricity costs, which helps minimize our cash outflow. Regarding whether we will sell the Bitcoin we hold to profit from future price appreciation, we have recently heard this question from several investors. We have had many internal discussions on this topic, but due to our belief that Bitcoin is undervalued, combined with our long-term confidence in its global adoption, We are currently not considering selling our Bitcoin in the upcoming quarters. If the price of Bitcoin expresses a significant increase, we will revisit this topic and re-evaluate.

Thank you. Questions? One moment for the next questions. Next up, we have the live from Mike Lick from the Benchmark Company. Please go ahead.

Thank you. Good morning. Could you comment a little bit about the site for 11,000 units sale plus you mentioned had about 36,000 units being sold? Can you comment on what you're seeing from a pricing environment with that and how margins are holding up there?

Thank you, Michael. This is James. I think, yeah, recently we have secured more large-scale orders, including the agreement with Cypher, 11,000 machines. I personally joined the meetings with Cypher team in New York and also in Singapore. Honestly, I really like their strategic ambition and their professional execution capability. I'm happy they consider our A13 series very suitable for their new mining operation in West Texas. I think the deal benefits both Cipher and the Canaan. In terms of the price trend about the whole current pricing environment, it looks like the customer demand is coming back step by step. The inventory of the market, no matter new machine or second hand machine, are still quite sufficient, especially in North America. So the price did not coming up. Instead, in quarter one, we saw the price going down. So it looks like currently the demand is getting back, but the price is still low. It looks like the Bitcoin price continues to increase a little bit with some turbulence recently, but we still anticipate in the coming months the Bitcoin price could be coming up again. With that trend, the selling price has challenged to going up, but currently nobody can assure that. So I just let you know that, frankly, express myself and let you know my thinking.

Thank you, Michael. Just to follow up, can you comment on the inventory, how much of it is finished goods versus raw materials, chips? And then also, how long do you depreciate your mining equipment for on the Bitcoin mining side?

Currently, I think looking at the overall situation in the mining machine market,

Customer purchasing demands have partly recovered and also reflected in a significant growth of 126.8 in the company's first quarter computing power sales compared to the previous quarter.

However, I think the financial situation of miners is still not optimistic, so they lack processing power. On the other hand, the market inventory supply is relatively abundant, thus the selling price of mining machines remains at a low level.

I think compared to the end of December, we have seen a rebound in Bitcoin price in the past over one quarter. This has brought better mining profits to miners and helped improve their financial situation. In the industry cycle, some miners have undergone restructuring and the new miners continue to enter the market, driving the continuous increase in the network computing power. As mining farm construction gradually completes and the weather in the northern lead to abandoned hydroelectricity resources. It is expected to future stimulate the demand of computing power and provide support for the selling price. Let's see.

I think, Michael, you asked about the depreciation of mining machines deployed in the mining Actually, it's 18 months is our depreciation policy. Usually, after 18 months, all the depreciation will be completed. About the inventory combination, I should say the finished goods are not that huge inventory. It's less than 50% of the total inventory we put, and also some are still waivers and still chips. It takes time to assemble those materials into machines. So far, we also control the speed of the assembling, make sure the inventory is just sufficient, not too much to increase the storage cost or too small to have shortages. I think that's our inventory data. I don't know if I answered your question, Michael.

Yes, that was perfect. Thank you very much. I appreciate it, and congrats on completing the quarter. Thanks.

Thank you, Michael. Thank you for the questions. Our last question comes from the line of Jiara Chu from China Renaissance. Please go ahead.

To A13 series. I just want to know what is the estimated rate revenue contributions for a 13-series product this year? And also, in terms of the pricing strategy, do we see any increased room for overall ASP per touch in Q3 or Q4? That's my first question.

I think this is a very specific question about the A12 and A13 series. we have this transition period to try to clear the inventory of A12 model and also the A13 series after the launch, the customers test and also they start to place orders in quarter one. It looks like the performance of A13 series is better than what we expected. In quarter one, the total revenue of A13 series is already occupying like 47% of total machine sales revenue. So we have confidence that quarter two A13 series will definitely becoming our biggest revenue source. For A12 series, I think our target is try to clear the inventory before end of quarter three, but of course as soon as possible. We do have a very low price for A12 currently. About our price strategy in the coming quarters, I think as previously mentioned, the demand currently is still in the weak level and it looks like we need time to collect the demand back and also getting the price come back to normal. I think quarter three will be the quarter we see the price going up most likely. We hope it will happen. We also consider there is possible increase of A13 series price, but currently in quarter two we didn't do that because the market inventory digestion is still ongoing. So hopefully in quarter three and quarter four, we can see more positive changes. That's my answer.

I have a follow-up because I remember the last quarter score, we mentioned that we expect maybe a 13-series bill accounts for 70% to 80%. of total revenue for the whole year. So I was just wondering if this number will improve a little bit given the better performance on A13 series products.

Yeah, currently I still think A13 series could be higher than 70% of your total year sales because like in quarter four, if our projection about the Bitcoin price is very correct, Then in quarter four will become a peak season. At that time, A13 series will have good sales in quarter four. During the whole year, I still think A13 series could be 70% to 80% of total sales. I think let's hope it happen because the price can even have an upside that will be better Thank you, Lenny.

Okay. Okay, got you. And my second question is in terms of the mining business revenue contribution. I know that in first quarter, the revenue contribution rose to around 20%, right? So just wondering in a longer-term basis, what's the reasonable revenue mix is – How should we think the reasonable revenue contribution for mining business maybe in a longer term consideration?

Manish, I think this is a very good question. From a company, we do both machine sales in semiconductor design field and also do mining business. I think from our current view is like our mining revenue is about 20% of the total business. We expect it to remain within the range like 15% to 20% in the future. Of course we should try our best to expand our deployed machines and increase our hash rate in future, but I think the thing is based on we can sell more machines rather than quarter one. It looks like in quarter one machine sales we are still in the bear market. That makes the, you know, 70% of mining business Actually, from a long-term perspective, my personal view is it should be like 20 to 30% in our total business. We are still a company major in manufacturing and design machines, and then the mining business will continue to grow, but we will leave more room to our customers in a modest way. Thank you, Ben.

Okay, got you. Very cute. Thank you very much.

Thank you. Okay, no further questions now. I'd like to turn the call back over to the company for any closing remarks.

Thank you again, everyone, for joining our call today. If you have any further questions, please feel free to reach out to us through the contact information provided on our website. And thank you again.

Thank you. That concludes today's call. Thank you everyone for attending. You may now disconnect. you Thank you. music music Thank you. Ladies and gentlemen, thank you for standing by and welcome to Canons Inc's first quarter 2023 earnings conference call. At this time, all participants are in listen-only mode. After the management's prepared remarks, we will have a question and answer session. Please note that this event is being recorded. Now, I'd like to hand the conference over to your speaker host today, Mr. Clark Soucy, Investor Relations Director of the company. Please go ahead, Clark.

Thank you. Hello, everyone, and welcome to our earnings conference call. The company's financial and operating results were released by Newswire Services earlier today and are currently available online. Joining us today are our Chairman and CEO, Mr. Nan-Gung Jung, and our CFO, Mr. Jin Chung James. In addition, Mr. Leo Wang, IR Senior Director, and Ms. Shi Zhang, IR Manager, will also be available during the question and answer session. Mr. Zhang will start the call by providing an overview of the company and performance highlights for the quarter. Mr. Chung will then provide details on the company's operating and financial results for the period before we open the call up for your questions. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release. Today's call will include forward-looking statements. These statements include, but are not limited to, our outlook for the company and statements that estimate or project future results of operations or the performance of the company. These statements speak only as of the date hereof and the company assumes no obligation to revise any forward-looking statements that may be made in today's press release, call, or webcast except as required by law. These statements do not guarantee future performance and are subject to risks, uncertainties, and assumptions. Please refer to the press release and the risk factors and documents we file with the Securities and Exchange Commission, including our most recent annual report on Form 20F for information on risks uncertainties, and assumptions that may cause actual results to differ materially from those set forth in such statements. In addition, during today's call and webcast, we will discuss both GAAP financial measures and certain non-GAAP financial measures, which we believe are useful as supplemental measures of the company's performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release, which is posted on the company's website. With that, I will now turn the call over to our chairman and CEO, Mr. N.G. Jung. Please go ahead.

Hello, everyone. I'm NG, the CEO of Canaan. Thank you for joining our conference call. James and I are at the company's headquarters in Singapore, sharing the corporate report conference call with you. Compared to Q4 of previous year, Q1 of 2023 has brought more hope to Bitcoin mining industry. Although the Bitcoin price still fluctuates, it has generally stepped out of the bear market and shown an upward trend. The confidence of miners has gradually recovered, and coupled with the traditional peak season in the first quarter, there are signs of a revival in purchasing demand. Although the purchasing power of large miners is still limited by cash flow, pace of facility construction and the financing environment. This has not affected the positive trend of the market. Regrettably, the selling price in the mining machine market is still declining and the first quarter is still in a bear market state. In this ever-changing market environment, we believe that maintaining strategic continuity and timely adjusting tactical decisions according to market dynamics are equally important. In other words, we need to keep investing in business and assets that bring long-term value while also carefully handling our company's balance sheet. I would like to introduce to investors the four strategic focuses that we have been concentrating on. and our actions in this area. First, we insist on long-term R&D and production capacity investment. Second, we continue to develop and improve our multi-faceted sales system to connect and assist global customers. Third, we adhere to our own mining strategy, overcome difficulties, and continue to expand mining deployment. Finally, we maintain a solid balance sheet and accumulate valuable assets with great potential. I will elaborate on these four points one by one. Firstly, we are committed to R&D and production capacity. Product development and capacity assurance remain our major input and investment in the first quarter of 2023. The specific data will be shared by James later. As a technology and product-oriented company, the importance of product power in our industry is self-evident. We always put product development first. As mentioned in the last financial report, our latest generation A13 series mining machine was introduced in the industry's winter in late October last year, we insisted on maintaining close cooperation with upstream foundries, mass-produced in the first quarter, and further improved the yield and computing power efficiency through technical adjustments and process improvements. Our A13 series has reached and exceeded our previous design and expectations in terms of yield rate and actual performance. In the first quarter, we have achieved stable supply. In actual use by customers, the excellent computing power consumption and the quality of A13 series has also been recognized, and the shipment volume has grown rapidly. Whether in a bear market or a wool market, we always insist on intuition and strive to make the best mining machines. Even when A13 series was not yet mass-produced and the market was at its most bearish, our new product development was always in full swing. We are well aware that the market requires the performance of mainstream products to take a big step forward about every half a year. And we must keep up. And the continuous launch of new products often means continuous supply chain investment. In the first quarter, our mass production and investment in the supply chain exceeded 50 million US dollars. I believe that our efforts and resource input will pay off in the subsequent product performance improvement and supply chain stability. Secondly, we are dedicated to developing and enhancing our sales system to reach global customers. The industry we are in is fast growing and unpredictable. In each bear bull cycle, the industry undergoes reshuffling, with some miners leaving and new ones joining. As miners continually seek and develop standard chip energy worldwide, transforming wasted energy into reusable power, both the density and the location of miners are constantly changing. Starting from the first quarter of this year, we accelerated the construction, development, and the improvement of our comprehensive international sales system. Our sales system is now divided into three parts, large clients, channels, and retail. And it is assisted by online stores and original business developments, allowing us to better reach and convert customers worldwide. In the first quarter of 2023, the overall industry was affected by inventory, competition, financing conditions, and cash flow. Although sales volume in the mining machine markets saw a slightly recovery compared to Q4 of 2022, we still remain in a bear market with a continuous decline in average selling price of computing power. A series of small and medium-sized Bank failures in the U.S. late in the quarter also had some impact, causing delays in payment and shipment for some orders. These factors resulted in less than ideal sales revenue for this quarter. We achieved total sales of 4.22 million terabytes per second, sequential growth of 126.8%, but the total quarterly revenue of $55 million was below our expectations. However, we also see positive aspects. Although demand from large clients in the US fluctuated, our expanding sales system quickly seized many sales opportunities in other regions. With the total number of purchase orders rising to over 500 in Q1, in the first quarter, We actively developed sales channels in Southeast Asia and established cooperation with local distributors in Thailand and Malaysia for the first time. Our online store targeting overseas retail customers attracted orders from about 20 countries, including first-time contacts in several countries such as Greece, the Netherlands, Argentina, Brazil, Mexico, and the Philippines. As we enter Q2 and the market storyline, the initiatives and efforts we implemented in Q1 are starting to show more results. For instance, we recently signed a contract order of 11,000 units of our A13 product with Cypher, a public we listed institutional mining clients in North America. Before that contract, we assisted the clients to conducting extensive onsite tests for our products at their mining set in Texas. The client ultimately recognized the excellent performance of our A13 series products under relative extreme weather conditions. Recently, We have also signed a series of large-scale contract orders for an additional 36,000 mining machines in other regions, which are expected to be delivered in succession before the end of the fourth quarter of 2023. The recent appearance of these large contract orders across multiple markets confirms that our business and product strategies are correct. Lastly, the return of contract sales orders will also help us improve our cash flow situation. Thirdly, we stick to our mining strategy and continue to expand our mining deployment. Since the company started mining operations in the second half of 2021, we have faced many challenges. Despite these, We have formally established mining as a strategy priority and secured a place for ourselves in the global, rapidly developing industry of Bitcoin mining. In the first quarter of 2023, the probability of mining improved due to recovery of Bitcoin prices, and some sites that were forced to shut down in the fourth quarter of 2022 were able to restart operations. This quarter, we produced 476 Bitcoins, contributing a mining revenue of $11 million, a slight increase from the previous quarter and a new record high. We are continuously exploring more mining opportunities in different regions and reducing our comprehensive mining operation costs. Even though the total network computing power is still rising, the increase in Bitcoin price and the recent industry events like BRC20 have boosted mining income during certain periods. We anticipate that the company's mining income will reach a new high in the second quarter. As of March 31st, 2023, we have deployed computing power of over 5x hash per second to our mining sites. However, Due to severe cold weather and contract execution issues, the total power is installed is over 4 exahash per second. This figure is lower than our forecast in the previous quarter's financial report. We will continue to strive to improve our deployment, deployed computational power data with our cash flow and operational capabilities. Lastly, we are dedicated to maintaining a health cash flow and accumulating assets with strong growth potential. Canon has just completed a full decade from its inception in early 2013 to the first quarter of 2023. We've weathered many market ups and downs and have gained some unique experience in managing our balance sheet. In the first quarter of this year, our prediction about the price of Bitcoin was mostly accurate, but the sales of our mining machines proved to be more difficult. We achieved improvements in sales and the return of contract sales orders in the second quarter, which continued to contribute our revenue and cash flow. This also was noting that the healthy and The healthy and stable supply chain resources we accumulated over the years have helped us seize opportunities to mass produce and deliver mining machines at the price of Bitcoin rises. Meanwhile, our Bitcoin assets continue to grow. Once again, we exercise our strategy of holding Bitcoins. Bitcoins generated from mining are only used to pay for direct operation costs such as electricity. Our self-developed and self-produced mining machines products and the mining power deployed to the mining sites as important assets for producing Bitcoin contain huge growth potential as Bitcoin price continues to rise in the medium and long term. In some cases, already deployed mining machines can be resold with warranties. In this brand new industry, we are making history every day. Even for me, the first quarter of 2023 was a challenging start. The uncertainty in the reality has made our performance less than ideal. However, our direction has not divided significantly. Since the second quarter, Although the price of Bitcoin has not risen sharply, the company's operational results have been more positive, which is the result of the hard work of all KNN employees. However, we must also see that the current economic environment is not optimistic. The cloud of uncertainty still looms over us, and the price of Bitcoin may still continue to fluctuate. At least in the United States, the financing ability and the purchasing power of miners in large miners' farms have not yet recovered. Coupled with the current situation where the decision has not yet been completed, both sales prices and the gross profit will continue to be concentrated. The above comprehensive situation, we are extremely cautious about expectations for the second quarter of 2023. The revenue for the second quarter of 2023 is expected to be about $72 million. This forecast is based on the current market and operating conditions of the company, and the actual situation may vary. In the final section, I would like to share some new insights on my personal beliefs about decentralization and Bitcoin. We often hear doubts about the utility of Bitcoin. In fact, the use of Bitcoin is complementary in the development of new technologies, and its function as a medium of payment and value storage has never changed. Over the past 10 years, the two pieces of the puzzle leading to VAP3 has been largely completed, namely blockchain-based digital currencies and the smart contract technology. In our last Earnings Core, someone asked me whether I think Bitcoin is a risk asset. I've thought more about this question since then. In the short term, Bitcoin indeed shows some characteristics similar to risk assets, but in the medium term, Bitcoin should be seen as a powerful hashing tool against systematic, against systemic risk, and in the region in the current global financing system. and even as a tool against global political and economic uncertainties. This isn't hard to understand. But in the long term, in the new information-driven world of Web3, blockchain-based digital currencies are likely to become mainstream applications and have broader prospects. Once, I had a long discussion with GPT-4 about the future of AGI becoming mainstream in the world. I'm almost certain that AGI will be the last piece of puzzle of Web3. The final creation of Web3 will be decentralized individually distributed AI system. At that time, digital currency and smart contracts based on blockchain will reshape the financing system of the new world on the basis of consensus. Most trustworthy, efficient, transparent are greatly improving the level of productivity and promoting the process of the entire society. Today, we are a provider of computing power products and services in the blockchain industry. Going forward, I hope to further expand our technology and have the opportunity to participate in the broader changes in the future, bringing value to customers with computing power products and services, and to support the progress of society. This concludes my prepared remarks. Thank you, everyone. I will now turn the call over to our CFO, James. Thank you.

Thank you, MG, and good day, everyone. This is James speaking in our Singapore headquarters. Firstly, I would like everyone to notice that we have changed our reporting currency. Starting from January 1st, 2023, we've decided to change our reporting currency from RMB, or so-called Chinese Yuan, to US dollars. The change of the reporting currency will better illustrate the results of our global sales and is another important step in our internationalization strategy. We have applied the change of reporting currency retroactively to our historical results of operations and financial statements. It will also be easier for our investors to read and analyze our financial reports in one currency. As NG studied the COVID, the first quarter of 2023 was challenging due to the revised but still weak market demand and declining selling price. From company perspective, we are committed to maintaining our strategic continuity. We kept investing in R&D and production capacity. We developed and upgraded our sales system to reach global customers. We continued to expand our mining deployment, and we strived to maintain a healthy cash flow and accumulate assets with strong growth potential for our shareholders. Overall speaking, in quarter one, total revenue generated was $65.2 million, which did not meet our guidance of $65 million. The gap consisted of approximately $6 million in machine sales and $4 million in mining business. Let's begin by discussing our machine sales. Our revenue of mining machine cells was $43.7 million in this quarter, 7.6% lower than $47.3 million for the last quarter. In the first quarter of 2023, the industry was affected by inventory, competition, financing environment, and cash flow. And the average selling price of computing power continued to decline. We actually increased our sales volume in computing power, reaching 4.2 million terahash per second, with a substantial increase of 126.8% compared to Q4 last year. However, the average selling price dropped to $10 per terahash per second, as we needed to adjust our prices in line with the overall market for Bitcoin mining machines. Additionally, affected by a series of U.S. bank failure events in mid-March, payments and shipments of some orders have been delayed. After that period, we received more orders and recorded customer advances of $8.3 million at the end of March. This laid a good foundation for the machine sales revenue in the second quarter. Our gross profit for mining machine sales was $5.2 million, and our gross margin rate for mining machine sales was 11.9% in this quarter. Turning to our mining business, our mining revenue was 11 million US dollars in this quarter, 3.3% sequential increase compared to 10.7 million US dollars in quarter four last year. It's a new record high. However, this revenue did not meet our expectation. We temporarily shut down the machines at several mining sites during January due to low Bitcoin prices. We believe this was a necessary measure to minimize operating losses. This had an impact on the quarterly mining revenue results. In this quarter, our total deployed hash rates reached more than 5 exahash per second, and our installed hash rates reached more than 4 exahash per second. We mined 476 Bitcoins in this quarter and achieved 19.8 Bitcoins for mining profit. Gross profit was $0.2 million for our mining business in this quarter. Please notice here that mining profit or loss is defined as the proportion of mining revenue deducting costs for energy and hosting in terms of mining revenues without consideration of depreciation. Now talking about our AI business, we recorded 0.41 million US dollars for AI revenue in this quarter. It is 68.6% increase compared to 0.24 million US dollars for quarter four. The sequential revenue growth was mainly driven by the increased sales volume for AIoT customers. Switching to the expense, our R&D expenses stood at 19.1 million US dollars in this quarter, compared to 33.4 million US dollars in the last quarter and 15.2 million US dollars in the prior year period. The quarter-over-quarter decrease was due to the one-off expenditure for our new generation chips incurred in the last quarter. Excluding this one-off expenditure impact, our R&D expenses remained stable sequentially. The steady year-over-year growth reflected our continuing commitment to building our talented R&D team. Our sales and marketing expenses were 1.5 million U.S. dollars compared to 1.1 million U.S. dollars in the last quarter and 3.0 million in the prior year period. Sales commission reduced year over year because of revenue downsizing. Our general administrative expenses in this quarter was $17.6 million, compared to $24.6 million in the last quarter and $19.8 million in the prior year period. The decrease was mainly due to $2.6 million of realized gains on Bitcoin sold in this quarter for electricity costs. which offset our G&A expenses. Please note when we do disposal of Bitcoin, the gain or loss upon booking value will be recorded into G&As. The net result of the foregoing was an operating loss of $85.7 million for this quarter, which is 31.4% narrower than the last quarter. The net loss was recorded as $84.4 million, which is 8% narrower than the last quarter. It is important for us to keep our eyes on the cash flow. We held cash and cash equivalents of $72 million at March 31st. As our CEO shared, we committed to securing future production capacity during this quarter. We spent $53.9 million to secure wafer supply and machine production. Other cash payments included $28.6 million for operations and $4.7 million in the tax expenses. Please note that as we paid the year-end bonus in January, the outflow on operation was higher than usual round rate. The cash out, totaling $87.1 million, was net off by inflows of $54.8 million from sales and the proceeds of $3.1 million by the ATM facility. Turning our attention to our Bitcoin assets. We held 623 Bitcoins as of March 31st, decreased from 757 Bitcoins by the end of 2022. First, we mined 476 Bitcoins in this quarter. In order to reduce the effect of Bitcoin price fluctuation on the profitability of our mining business, we implemented a pre-exchange plan in this quarter. That is, at the beginning of each month, we would exchange Bitcoins to US dollars based on the current price in advance for the monthly electricity cost. This new process eliminated possible risks triggered from significant Bitcoin price fluctuations. In total, we exchanged 699 Bitcoins for the electricity cost in this quarter. This aforementioned resulted in a decline of 134 Bitcoin quarter over quarter. It is a one-time change. From March 7, 2023, the date we reported our financial results for the fourth quarter of 2022 to May 25, 2023, we utilized the ATM for a small amount of fundraising to test the financing facility. During the above period, we sold 1.5 million 32,219 ADSs with net proceeds of approximately 4.2 million US dollars at an average price of 2.73 US dollars per ADS. We executed the above sales within 10 trading days in March, and we did not utilize the ATM after March 31st. From March 7th, 2023, the date we reported our financial results for the fourth quarter of 2022 to May 25th, 2023, we did not purchase any ADS back. In future, we will prioritize our shareholders carefully monitor cash flows and stock prices, and practically execute ATM or stock repurchase. In quarter two, we anticipate the revenue of $72 million, a 30% increase from quarter one. Despite the market's gradual recovery, we have secured some contract sales orders from major clients and distributors. This has bolstered our cash flow and allowed us to invest in strategic areas of focus. However, it is important to note that we operate in a dynamic market with uncertainties, so our estimation reflects our current perspective and understanding of the operation. Now, I would like to briefly walk you through our financial results for the quarter. Revenues in the first quarter of 2023 were $55.2 million as compared to $58.3 million in the fourth quarter of 2022 and $201.8 million in the same period of 2022. Gross loss in the first quarter of 2023 was $47.5 million, compared to a gross loss of $64.1 million in the fourth quarter of 2022, and a gross profit of $123.5 million in the same period of 2022. Total operating expenses in the first quarter of 2023 were $38.1 million, compared to $60.8 million in the fourth quarter of 2022 and $38.0 million in the same period of 2022. Loss from operations in the first quarter of 2023 was $85.7 million, compared to a loss from operations of $125.0 million in the first quarter of 2022, and an income from operations of $85.4 million in the same period of 2022. Net loss in the first quarter of 2023 was $84.4 million, compared to a net loss of $91.6 million in the fourth quarter of 2022, and a net income of $65.1 million in the same period of 2022. Basic and diluted net loss per ADS in the first quarter of 2023 were $0.51 As of March 31, 2023, the company had cash and cash equivalents of US$72.0 million. This concludes our prepared remarks. We are now open for questions.

Thank you. We will now begin the question and answer session. As a courtesy to other investors and analysts who may wish to ask a question, please limit yourself to two questions at a time. If you have any follow-up questions after the Q&A session, the Investor Relations team will be available after the call. For the benefit of all participants on today's call, if you wish to ask your question to Management in Chinese, please immediately repeat your questions in English. To ask a question, please press star 11 on your telephone and wait for a name to be announced. To cancel your request, please press star 11. There'll be a short silence while questions are being collected. One moment for the first question. We have the line. Your first question today comes from the line of Kevin Dede from HC Wainwright. Please go ahead.

Thank you very much for taking my question. I was wondering if you might be able to offer a self-mining hash rate target for the year. maybe disclose a little bit on what you're seeing in terms of the availability of hosting sites. And then secondly, I was hoping you could share a little bit more geographic information on equipment sales. It's very comforting to see that sales are growing outside of North America, and I was wondering if you might be able to segment sales from Asia, North America, and European framework. Thank you very much.

As we mentioned, as of March 31st, the deployed computing power at our mining farms exceeded 5x hash per second. However, in the first quarter, the installment of computing power was lower than expected due to weather conditions and the contract execution issues, resulting in total installed hash rate was over 4x hash per second. In the second quarter, we entered into a mining partnership with Stronghold. in early May, which involved 4,000 mining machines with a total capacity of 0.4 XH per second. At the same time, we are also exploring more mining partnership opportunities in regions with abundant energy resources around the world. Our mining business has expanded into many geographical regions where we had no previous crisis. The local critical economic and infrastructure conditions in these areas are complex and subject to change, which pose challenges to our explanation and development efforts. This further tests our team's operational capabilities and ability to adapt to changes. Therefore, we have a more conscious outlook on mining expansion. We currently estimate that the installed mining hashrate in Q2 will be around 4.5x hash. This forecast is based on the current operating conditions, and the actual situation may be different. Mining is a long-term strategic focus for us, and as it complements our mining machine sales business and allows for the effective utilization of more inventory. We will actively and prudently, collaboration of opportunities, negotiate in terms of cooperation and strive to continuously increase the installed mining hatchery to generate Bitcoin mining cap.

I will take the second question from Kevin. It's about the geographical situation of the mining industry. I think the leading market is still United States, but it looks like the inventory, no matter new machines or second hand machines, are still quite sufficient inside the you know, the whole North America market. So it looks like the more opportunities come from Southeast Asia, Middle East, and even South America market. And we noticed some retail, you know, customers are ordering machines even from Africa and from, you know, West Europe. I think Depends on the energy of the local level usage. I think that the mining business will grow as we expected to global level and more and more areas will join this mining business. And it will rapidly change because of different locations may have different regulations coming out related to mining. But from our perspective, we would like to see all kinds of opportunities especially like in this quarter we had the connection with Malaysia and Thailand the distributor which enabled us to touch the customers customers locally in those two countries we were developed more as CEO said build up our sales channels to make sure we get in touch with our customers locally and we also would like to continue the dialogue with big clients in North America. Cyber is just a beginning of us, so we have confidence to discuss more customers, discuss with more customers, and let them enjoy the A13 series machines for their mining purpose. So I hope that answers your question, Kevin.

Yes, so phenomenal. I really appreciate the detail. I hear great things about the A13, but I cannot leave the call without hearing from NZ what Bitcoin price is going to be this year.

Okay, I think...

In short term, I think we have no need to do mid-term or long-term prediction of Bitcoins. But for short term, I think the Bitcoin price is related to the economic environment, especially for US. So I think you know the answer. I think you know the numbers. Yeah. We hope to have you arrive in the second half of this year.

Thank you very much, gentlemen. I appreciate the opportunity to ask questions. Thank you very much.

Thank you. One moment for the next question. Next, we have the live from Shuang Sun from Guoshan Securities. Please go ahead.

Hello, can you hear me? Yes.

Oh, yes. Hello, NG, and James. I want to know about the new progress of the company's AI edge computing chip and the application scene. Because everyone knows that the capital market has been very concerned about AI in the past few months. And then the company just happened to have this business. So I want to ask that please introduce the new progress and application scenarios of the company's AIH computing chips.

Okay.

Recently, the AI industry represented by products like ChessGPT has revealed an important part. I think the reason why the AI industry has not developed as expected over the years is not due to AI itself. But rather, like many other industries, it is the result of a contradiction between the users' expectations for the product capabilities and what the industry can provide at a certain cost. When AI products can truly bring significant benefits to users, then you see the result. The response is very positive. Therefore, I'm currently restructuring the company's AI department and business to ensure that our technology and investments can embrace future of AGI, artificial general intelligence. I mean world in the short to medium. But in the short to medium term, we believe that an important function of AIoT and Edge AI is to convert real world like images, sounds, and sensor data into text and code. or code information that can be understood by large-language models like JetGPT. While complex decision-making is not a strength for HCI today, this is where large-language models excel. Our K230 chip has highly efficient HAI capabilities and advantages in terms of low cost and low power consumption. Therefore, we are adjusting the direction of our product applications to adapt to this trend. In the long run, as I mentioned in the CEO remarks, I will explore ways to horizontally expand our technology and participate in future and broader transformations. We aim to bring value to our customers through more general-purpose computing power, products, and services, and support society progress. Thank you.

Thank you. 我们也觉得AI算力跟加密财务挖矿挺像的,就是都是投入电力跟算力,然后获得就是回报。 那我的第二个问题是,最近因为Audino跟B2C20比特币网络上的交易费用比较高,公司的挖矿业务, Is there any upside to the company's mining business going forward due to the very high transaction fees?

I think according to Satoshi Nakamoto's vision, transaction fees will become an important complement for miners' income after multiple halvings. It appears that the industry is developing as expected. So recently, due to events like BRC20, the increase in Bitcoin transaction fees has been beneficial for both miners and our own mining business. In a situation where the network's total computing power remains constant, miners can earn more mining fees. So we hope that miners and ourselves can improve our financial situation and that our customers can recover their processing power more quickly. Thank you. Thank you.

The third question is, will the company consider selling these Bitcoins as the company has a growing supply of Bitcoins on its balance sheet? What is your strategy for potentially selling them?

Currently, we do not have any plans to sell our Bitcoins. And there are several reasons for that. Firstly, our mining operations are still in the early stages of scaling up, so we have been focused on the development. You may notice that we do sell mine Bitcoin to cover our mining facilities electricity costs, which helps minimize our cash outflow. Regarding whether we will sell the Bitcoin we hold to profit from future price appreciation, we have recently heard this question from several investors. We have had many internal discussions on this topic, but due to our belief that Bitcoin is undervalued combined with our long-term confidence in its global adoption, We are currently not considering selling our Bitcoin in the upcoming quarters. If the price of Bitcoin expresses a significant increase, we will revisit this topic and re-evaluate.

Thank you. Questions? One moment for the next questions. Next up, we have the live from Mike Lake from the Benchmark Company. Please go ahead.

Thank you. Good morning. Could you comment a little bit about the site for 11,000 units sale plus you mentioned had about 36,000 units being sold? Can you comment on what you're seeing from a pricing environment with that and how margins are holding up there?

Thank you, Michael. This is James. I think, yeah, recently we have secured more large-scale orders, including the agreement with Cypher, 11,000 machines. I personally joined the meetings with Cypher team in New York and also in Singapore. Honestly, I really like their strategic ambition and their professional execution capability, so I'm happy they consider our A13 series very suitable for their new mining operation in West Texas. I think the deal benefits both Cipher and the Canaan. In terms of the price trend about the whole current pricing environment, it looks like the customer demand is coming back step by step. The inventory of the market, no matter new machine or second hand machine, are still quite sufficient, especially in North America. So the price did not coming up. Instead, in quarter one, we saw the price going down. So it looks like currently the demand is getting back, but the price is still low. It looks like the Bitcoin price continue to increase a little bit with some turbulence recently, but we still anticipate in the coming months, Bitcoin price could coming up again. With that trend, the selling price has challenged to going up, but currently nobody can assure that. So I just let you know that, frankly, express myself and let you know my thinking.

Thank you, Michael. Just to follow up, can you comment on the inventory, how much of it is finished goods versus raw materials, chips? And then also, how long do you depreciate your mining equipment for on the Bitcoin mining side?

Currently, I think looking at the overall situation in the mining machine market,

customer purchasing demands have partly recovered and also reflected in a significant growth of 126.8 in the company's first quarter computing power sales compared to the previous quarter.

However, I think the financial situation of miners is still not optimistic, so they lack processing power. On the other hand, the market inventory supply is relatively abundant. Thus, the selling price of mining machines remains at a low level.

I think compared to the end of December, we have seen a rebound in Bitcoin price in the past over one quarter. This has brought better mining profits to miners and helped improve their financial situation. In the industry cycle, some miners have undergone restructuring and the new miners continue to enter the market, driving the continuous increase in the network computing power. As mining farm construction gradually completes and the weather in the northern a hemisphere warms up, leading to abandoned hydroelectricity resources. It is expected to future stimulate the demand of computing power and provide support for the selling price. Let's see.

I think, Michael, you asked about the depreciation of mining machines deployed in the mining Actually, it's 18 months is our depreciation policy. Usually, after 18 months, all the depreciation will be completed. About the inventory combination, I should say the finished goods are not that huge inventory. It's less than 50% of the total inventory we put, and also some are still waivers and still cheap. and it takes time to assemble those materials into machines. So far we also control the speed of the assembling, make sure the inventory is just sufficient, not too much to increase the storage cost, or too small to have shortages. So I think that's our inventory data. I don't know if I answered your question, Michael?

Yes, that was perfect. Thank you very much. I appreciate it. And congrats on completing the quarter. Thanks.

Thank you, Michael. Thank you for the questions. Our last question comes from the line of Jiara Chu from China Renaissance. Please go ahead.

To A13 series. I just want to know what is the estimated rate revenue contributions for a 13-series product this year? And also, in terms of the pricing strategy, do we see any increased room for overall ASP per tash in Q3 or Q4? That's my first question.

I think this is a very specific question about the A12 and A13 series. we have this transition period to try to clear the inventory of A12 model and also the A13 series after the launch, the customers test and also they start to place orders in quarter one. It looks like the performance of A13 series is better than what we expected. In quarter one, the total revenue of A13 series is already occupying like 47% of total machine sales revenue. So we have confidence that quarter two A13 series will definitely becoming our biggest revenue source. For A12 theories, I think our target is try to clear the inventory before end of quarter three, but of course as soon as possible. We do have a very low price for A12 currently. About our price strategy in the coming quarters, I think as previously mentioned, the demand currently is still in the weak level and it looks like we need time to collect the demand back and also getting the price come back to normal. I think quarter three will be the quarter we see the price going up most likely. We hope it will happen. We also consider there is possible increase of A13 series price, but currently in quarter two we didn't do that because the market inventory digestion is still ongoing. So hopefully in quarter three and quarter four, we can see more positive changes. Venice, that's my answer.

I have a follow-up because I remember the last quarter score, we mentioned that we expect maybe a 13-series bill accounts for 70% to 80%. of total revenue for the whole year. So I was just wondering if this number will improve a little bit given the better performance on A13 series products.

Yeah, currently I still think A13 series could be higher than 70% of the total year sales because like in quarter four, if our projection about the Bitcoin price is very correct, Then in quarter four will become a peak season. At that time, A13 series will have good sales in quarter four. During the whole year, I still think A13 series could be 70% to 80% of total sales. I think let's hope it happen because the price can even have an upside that will be better Thank you, Leonard.

Okay. Okay, got you. And my second question is in terms of the mining business revenue contribution. I know that in first quarter, the revenue contribution was to around 20%, right? So just wondering in a longer-term basis, what's the reasonable revenue mix is – How should we think the reasonable revenue contribution for mining business, maybe in a longer-term consideration?

Manish, I think this is a very good question. From a company, we do both machine sales in semiconductor design field and also do mining business. I think from our current view is like our mining revenue is about 20% of the total business. We expect it to remain within the range like 15% to 20% in the future. Of course, we should try our best to expand our deployed machines and increase our hash rate in future, but I think the thing is based on we can sell more machines rather than quarter one. It looks like in quarter one, machine sales, we are still in the bear market. That makes the, you know, 70% of mining business Actually, from a long-term perspective, my personal view is it should be like 20 to 30% in our total business. We are still a company major in manufacturing and design machines, and then the mining business will continue to grow, but we will leave more room to our customers in a modest way. Thank you, Beth.

Okay, got you. Very cute. Thank you very much.

Thank you. Okay, no further questions now. I'd like to turn the call back over to the company for any closing remarks.

Thank you again, everyone, for joining our call today. If you have any further questions, please feel free to reach out to us through the contact information provided on our website. And thank you again.

Thank you. That concludes today's call. Thank you everyone for attending. You may now disconnect.