Canaan Inc.

Ladies and gentlemen, thank you for standing by and welcome to Canaan Inc's second 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 for the second quarter were released by our 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. James Jin Chung. In addition, Mr. Leo Wong, IR Senior Director and and Ms. Shi Zhang, IR Manager, will also be available during the question and answer session. Ms. Zhang will start the call by providing an overview of the company and performance highlights for the quarter. Mr. Chang will then provide details on the company's operating and financial results for the period before we open up the call 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 thereof, 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 and 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 website. With that, I will now turn the call over to our chairman and CEO, Mr. NG John. Please go ahead.

Hello, everyone. This is NG, the CEO of Canon. Thank you for joining our conference call. James and I are at the company's headquarters in Singapore and to share our quarterly results with you. During the second quarter of 2023, the price of Bitcoin remained at around $28K to $30K at both the beginning and the end of the quarter. However, for most of the quarter, it experienced a downward trend. while the overall network hashrate continued to steadily increase by about 15%. The rise in mining difficulty coupled with sluggish Bitcoin price did have certain adverse impact on both overall mining profitability and their willingness to make purchases. With the industry's inventory level remaining relatively high, the halving approaching and the pressure of product updates, all mining machine providers are eager to clear their inventory. As a result, the computation in the mining machine market has intensified, and the price of computing power continues to be under pressure. In summary, the mining machine market remains in a bear market. Given this situation, our efforts are twofold. On the one hand, we are dedicated to upholding our financial resilience and ensuring stable operations. On the other hand, we are also actively allocating resources towards future growth opportunities. I would like to take this opportunity to discuss several strategic points that we are focusing on. First, we are committed to long-term investment in R&D and production capacity to continuously upgrade and integrate our products. As we mentioned earlier, our A13 series products achieve stable supply and gain customer recognition for their performance, leading to a rapid increase in shipment volume in the first quarter of this year. During the second quarter, computing power cells of A13 series significantly surpassed that of the A12 series. We are constantly investing in R&D to enhance product computing power, increase power efficiency, and reduce cost. In the first half of this year, our products reached a power efficiency of 25 to 30 joules per terahash. In the second half of the year, we will further optimize the power efficiency range of new products to 20 to 25 GHz, fulfilling our previous commitments. Currently, these iterative products are in the machine debugging and the small-scale trial production stages, and we have started to take customer pre-orders. Even in the current challenging market environment, continuous investment in R&D and supply chain is crucial for our long-term development. Furthermore, in alignment with our planned strategy, we are diversifying our product portfolio beyond mining machines. Following an extensive period of R&D and testing, we are about to launch our proprietary integrated error code and liquid code stack solutions. These solutions will effectively assist miners in rapid deployment and adapt to mining operations in various hash-natural conditions. Our integrated 40-foot and 20-foot air-cooled mining container products and the 40-foot liquid-cooled Avalon Box Mining Container product have completed product development and prototype testing. They have already received orders and are expected to be delivered to customers in the second half of this year. Second, we continue to develop and refine our sales system to connect and support customers worldwide. Last quarter, we highlighted our work on building, developing and optimizing our comprehensive international sales system. We engaged with large clients, channels and retail customers to enhance our global reach and more effectively convert customers. This quarter, despite the market still being in bearish phase, our overall sales significantly improved on a quarterly basis. Our total computing power cells reached 6.1 million terahatch per second, up 45% sequentially, contributing to product sales revenue about 57.9 million US dollars. With the brief surge in Bitcoin transaction fees in early May, there was a small upturn in the demand of computing power. Seizing the opportunity, we responded decisively by rapidly expanding into the North American market, engaging key clients such as Cypher and Stronghold. Specifically, we received a significant order from Cypher Mining, resulting in 1.21 million terahertz per second of computing power cells. In July, we also secured a 220,000 terahertz per second sales order from Stronghold Digital Mining. This marks a significant milestone in our entry into the U.S. market. Meanwhile, in Southeast Asia, our distribution channels are steadily expanding. In the second quarter, 3.9 million of revenues was contributed by contributor sales. This fever further grew in the third quarter. Our online retail store, cutting to overseas customers, continued to expand its global customer base in the second quarter, reaching customers from Brazil, the UAE, Hungary, Cyprus, and Latvia for the first time. It was nothing that the world is vast, and establishing a global sales system takes time. We are working diligently and will share with you further positive updates. Third, we remain committed to our mining strategy and will continuously explore mining projects. During the second quarter, our mining business successfully initiated several new projects. Through our partnership with the public listed company Stronghold, we have installed the initial batch of 0.4 XH per second of computing power. Recently, we have reached an agreement with Stronghold to future expand our partnership, adding 0.2 XH per second of computing power, which is expected to be deployed and operational during the third quarter. Since the second quarter, we have also installed small-scale computing power for testing in Ethiopia and Paraguay, marking the first expansion of our mining business into this region. Although the total network computing power continued to rise in the second quarter, our mining operations achieved remarkable results. This was sent to our increased uptime and industrial events, such as BRC20, which boosted Bitcoin rewards for mining activities. During this quarter, we produced 569 Bitcoins, contributing mining revenue of $15.9 million, a sequential growth of 43.3. As previously announced, our mining business has been affected by recent policy changes in Kazakhstan, leading to the temporary shutdown of approximately 2x of installed mining power since early July. Furthermore, due to a default by a partner in the US project, 13,000 mining machines that were already installed along with the remaining computing power to be installed will be affected. These two incidents are expected to impact the operation of close to 3x hash per second installed computing power starting in the third quarter. At present, we are actively working with local partners in Kazakhstan to apply for the relevant licenses and adjusting our collaborative approach to resume regular operations at the mining site. At the same time, we are working diligently to address the default issue with the partners in U.S. projects through legal means, safeguarding the rights and interests for the company and our investors. It's important to note that we believe active global business expansion interminably comes with various difficulties and challenges, and the setbacks are a normal part of this journey. The key point is that our fundamental direction remains unchanged. We continue to leverage our advantages in computing power supply, holding mining as a key development strategy. At present, we are taking proactive steps to minimize the losses with also ensuring that the lessons learned are not in vain. We are absorbing experience and proceeding cautiously, expanding and exploring new mining project opportunities and accumulating high-quality Bitcoin assets. Finally, we will persevere through challenges, strive to maintain cash flows and ensure sustained operations. At the same time, we will accumulate assets with robust growth potential while strategically allocating resources to be fully prepared for the upcoming bull market following the next Bitcoin halving. This remains our unwavering strategy. Market environment was weak in the second quarter, yet our operational performance remained positive. However, the continued selling price decline has created a series of material non-cash growth or provisions, resulting in substantial losses on our financial statement of this quarter. In this challenging market environment, our focus on cash preservation has intensified. During the quarter, we didn't utilize our ATM facility or conduct financing activities. Our cash flow level experienced only a slightly sequential decline and was prudently managed overall. As we move further into the second half of 2023, US interest rate hikes have not come to a complete stop, and the global economic outlook remains increasingly uncertain. The midst of this uncertainty, unforeseen events still have the potential to caused significant fluctuations in the Bitcoin price. We believe that the broader market lacks sufficient upward momentum. In addition, large-scale miners' financing capabilities remain constrained. The recent harsh-risk growth curve also indicates a notable decline in the overall industry's incremental hashrate investment and deployment during the first three quarters of this year. This trend aligns with our market assessment. Furthermore, policy changes concerning cryptocurrencies and mining in various countries introduce further uncertainty to both the industry and our operations. In some cases, these changes could present unforeseen changes to our actual operations. Given all the factors I have just outlined, we have a highly cautious outlook for the third quarter of 2023. We expect that revenues for the quarter will be approximately US$30 million. This forecast reflects our current views on the market and operational conditions, and actually results may be subject to change. Overall, as you might already be aware, we have navigated several Bitcoin cycles since our inception in 2013. Our task is to confront and resolve the challenges we encounter. Much like Bitcoin itself, where every day we create new history, with each new day we become more experienced and stronger than the day before. We remain fully committed to performing ahead of the market curve. Next month, on September 12th, we plan to celebrate the company's 10th anniversary in Singapore. Canaan stands as an industrial chain and proudly holds the distinction of being the first NASDAQ listed company in our industry. Over the past decade, our evolution from a project group into a multinational company with leading chief design capabilities has been remarkable. As we step into the next decade of development, Canaan potential achievements in the coming decade are exciting to consider. This concludes my prepared remarks. Thank you, everyone. I will now turn the call over to our CFO, James. Thank you.