Canaan Inc.

Ladies and gentlemen, thank you for standing by and welcome to Canine's third 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 Susi, 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 our Newswire services earlier today and are currently available online. Joining us today are our chairman and CEO, Mr. Nan-Gun Jung, and our CFO, Mr. Jin-Chung James. In addition, Mr. Leo Wong, IR Senior Director, Ms. Shi Zhang, IR Manager, will also be available during the question and answer session. Mr. Chang 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 the 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 and uncertainties 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 an 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. Nganjian. Please go ahead, sir.

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 to share our quarterly results with you. During the third quarter of 2023, Bitcoin prices continued to decline and remained within a low price range. At the beginning of the quarter, the Bitcoin price was around US$30,000 and reached its quarterly low point of around US$25,000 in September. It then stayed in the range of $25,000 to $27,000 until the end of the quarter. During the third quarter, the total network hash rate remained fairly stable at around 400 exahash per second. Warners faced slim profit margins and there was a lack of motivation and not enough capacity for further investment and expansion of mining computing power. At the macro level, the US Federal Reserve raised interest rates by 25 basis points to 5.5%. The high interest rate environment limited Bitcoin prices upward movement and increased miners' financing and interest costs. As a result, the industry's purchasing and deployment capabilities were impacted. Meanwhile, inventory pressure on in-store mining machine models continued to rise. As mining machine manufacturers reduced prices to clear their inventory ahead of the upcoming halving event, we observed considerable price concessions in computing power. In the face of this challenging market environment, we achieved total revenue of $33.3 million, exceeding our guidance. At the same time, we kept carrying out our development strategies. This includes focusing on product R&D and integration, promoting multi-channel sales strategies, and exploring mining partnerships. We also maintained prudent and flexible operational management to ensure stable cash flow and ongoing business operations. This will help us to prepare for potential market opportunities in the future. Now let me go to more detail. First, we are committed to R&D and investment in production capacity. This allows us to upgrade our products to achieve breakthroughs in machine hash rate performance and energy efficiency. During our 10th anniversary event in mid-September, we officially launched our new generation of mining machine, the A14 series. The output A1466 achieves a hash rate of 150 terahatch per second with a power efficiency of 21.5 joules per terahatch. At the same time, we introduced the liquid-cooled A1466i mining machine, which achieves power efficiency below 20 GHz for the first time and has 170 THz per second of computing power. Besides our current offerings, we are actively developing new products. Following our usual practice, We will announce their performance once the machine testing is complete. We believe these products in the pipeline will align with next year's market mainstream production power efficiency level of 10 to 20 draws per terahash. We are also in the process of delivering our air cooled and liquid cooled integrated site solutions, which we have developed in-house. include 40-foot and 20-foot air-cooled mining box container products and 40-foot liquid cooling Avalon box mining container products. Our products are highly integrated, thus enabling rapid deployment, making them well-suited for mining in challenging natural conditions of cold and hot weather. On the sales front, we are boosting sales in a number of channels, including large clients, distribution networks, and online retail. We are also offering favorable prices to reduce inventory. During the quarter, we achieved a total computing power sold of 3.8 million terahatch per second. This represents an 8.7% increase compared to the same period last year, contributing about $30 million in revenue. In North America, we successfully completed the delivery of buck orders to Stronghold, a listed mining company. In Southeast Asia, our computing power sales reached 1.3 million teras per second. This figure was a 90.7% quarter-over-quarter increase achieved through deeper collaboration with channel clients. Our online store achieved computing power sold of 420,000 terahash per second this quarter, a 17% increase compared to the previous quarter. Our online store also expanded its reach to five new regions, including Poland and Peru, bringing its total number of regions its customer orders to 42. Following the September release of A14 series, we have received contract sales orders and prepayments for computing power of about 2 million terahit per second from customers worldwide. In addition, our multi-channel sales efforts are bringing the planned destocking of our and below traditional models closer to completion as expected. As previously announced, our mining business in Kazakhstan has been temporarily suspended since the third quarter due to the impact of new regulatory policies, and we need to obtain the relevant permits. we have also experienced a breach of contract by a mining project partner in the US. As a result, mining revenue for this quarter declined to US$3.26 million. However, we believe mining is a strategic part of our business, and short-term setbacks in certain regions will not affect our long-term strategy. we will continue to prudently explore cooperation opportunities. During the quarter, we expanded and diversified our mining footprint when we completed the deployment of several new projects in North and South America. Notably, the latest batch of 2,000 of our 13446 mining machines was successfully deployed and launched for our joint mining project with the listed mining company Stronghold in the third quarter. As of the end of the third quarter, we had approximately 4 exahash per second computing power deployed. We also hold 860 bitcoins owned by us, reaching a historical high with a current market value of over 30 million US dollars. Recently, we have been expanding our mining opportunities in South America and Africa. In the Middle East, we carried out our first pilot collaboration with our integrated liquid cooling mining solutions. We have been We have also been addressing some previously announced issues. In Haddax 10, we worked together with local mining partners to obtain the Type 2 license required for mining equipment owners in mid-November. We are currently working to register our locally deployed mining machines and are in the discussion with our mining partners to prepare for the resumption of operations. We expect that our mining projects in Kazakhstan will gradually resume around the end of 2023. For the project I just mentioned, where our US partners breached the contract, We have successfully taken possession of approximately all the mining machines involved. We have now restored about half of these machines. At the same time, we are carrying our legal procedures to protect our legitimate rights. The marketing environment in the third quarter was challenging. We endeavored to maintain cash flows and operations. and accumulate assets with strong growth potential. This will help us to allocate resources and lay for a foundation of full market after the next halving. We have also recently managed cost more prudently and optimized and adjusted our company's organization. We have reduced our total headcount to increase operational efficiency and reduce fixed operating cash outflows, smoothly navigating through the market downturn. These measures have been gradually carried out in the fourth quarter. We expected to see potential data reflecting these changes starting from the first quarter of 2024. Meanwhile, due to the overall weakness in the market purchasing power, we further adjust price to quickly clear the inventory and generate cash inflow. However, this adjustment also results in some non-cash provisions and impairments, leading to a considerable loss of this quarter. In terms of financing, we announced today a sales of convertible preferred shares of up to 125 million U.S. dollars subject to customary closing conditions with an institutional investor. This deal ensures we are able to carry out R&D and mass production of new products in case of tightening cash flow amidst the bear market. This safeguards our product supply and market share in the future bull market. We have not utilized our ATM since the third quarter to date. However, we recently adjusted our ATM project by appointing B-Ready as the new sales agent. Looking ahead, the Bitcoin price has been a notable rebound since mid to late October, which is encouraging. We are closely monitoring the market and flexibly adjusting our sales strategy and supply chain to adapt to changing market demands. However, it's important to note that sudden price increases in Bitcoin often come with increased volatility. The US Federal Reserve's seem likely to keep interest rates high for a while, and a rate-cutting cycle may not happen for some time. The financing and operating costs of our downstream miner customers remain high, and the basic landscape remains unchanged. Additionally, with Bitcoin halving approaching, market sentiment will likely be more cautious. Taking these factors into consideration, I believe that the first quarter has shown signs of improvement compared to the third quarter. However, we shouldn't expect the best-case scenario of both rising price and volumes to happen quickly. Based on the overall situation mentioned above, we provide a highly cautious outlook for the fourth quarter of 2023. We expect revenue of the first quarter of 2023 to be approximately $34 million, slightly higher than the third quarter. This forecast is based on the company's current market and operational conditions, and the actual results may vary. Finally, I would like to discuss our AI business with you. After several years of hard work, we have built a solid foundation of our AIoT chip R&D and sales, especially with the industry recognition since the release of K230. This is a small step in our strategic plan. Given the significant changes in the AI industry over the past few months, we have been strategically discussing the future of our AI business. In light of the current industry and the market environment, we believe that the development of our AI business should take a more defined, independent, and long-term direction. We are internally restructuring the business with the goal to clearly separate the mining machine and the mining teams from AI business as different business units. This prepares us for the future independent operation and potential financing for AI business. Both businesses will have enough scope for their future development. Personally, I'm really excited about this internal organization change. We operate in an industry full of variables and rapid changes, creating new history every day. This truly tests our operational capabilities. Over the 10 years since Canaan's inception, we have run into many difficulties and challenges. We have constantly improved our technical and operational capabilities to face and resolve these issues. Amidst a number of uncertainties, one thing is certain, our strong confidence in the Bitcoin network This emerging transaction system has operated remarkably stable over the past 14 years. Its user base and network hash rate have both continuously expanded. In recent years, more and more investment institutions have shown increased interest in cryptocurrencies, especially Bitcoin. They have also recognized it as an important asset class. With ongoing process in the regulatory environment, the divided between the general public and Bitcoin is narrowing. I believe this will be a crucial driver for the next bull market. We remain committed to growing alongside cutting-edge technology partners to continuously upgrade chip features. At the same time, we will support Bitcoin's system and a range of other beneficial activities with robust computing power. We will continue to deliver superior products and services to our customers while contributing to societal progress. Thank you, everyone. This concludes my prepared remarks. Thank you. I will now turn the call over to our CFO, James. Thank you.