Canaan Inc.

Ladies and gentlemen, thank you for standing by, and welcome to Canaan, Inc.' 's third quarter of 2024 earnings conference call. At this time, all participants are in a 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, Ms. Gwen Lauber, Ambassador Relations Director of the company. Please go ahead, Gwen.

Thank you. Hello, everyone, and welcome to the earnings conference call. Joining us today are our Chairman and CEO, Mr. Anjin Zhang, and our CFO, Jin James Chen. Leo Wang, Vice President of Capital Markets and Corporate Development, and Xi Zhang, Senior Manager of IR, will also be available during the question and answer session. Our CEO will start the call by providing an overview of the company and performance highlights for the quarter. Our CFO will then provide details on the company's operating and financial results for the period before we open up the call for questions. Before we begin, 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 operating results for the performance of the company. These statements speak only as of today, 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 risk 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 turn the call over to our chairman and CFO, Mr. Nanjin Zhang. Please go ahead, sir.

Hello, everyone. This is Anjie, the CEO of Canon. Thank you for joining our conference call. Our CFO, James, and I are pleased to share with you our third quarter results and recent developments. I believe everyone is thrilled with the Bitcoin price reaching new heights, and I share in this excitement. Q3 2024 marked our first complete quarter after the halving. During this quarter, the global Bitcoin mining market faced another round of challenges from Bitcoin price volatility. We saw average Bitcoin price climb by over 7% compared to the last quarter. At the same time, the total network hash rate grew by more than 10%. This combination pushed the hash price to historical lows, putting pressure on miners' profits. Despite these headwinds, we executed our plans efficiently, paying careful attention to every detail, Throughout Q3, we continued bug delivers of our A14 products. We completed the transition to mass production of our A15 series. We expanded our global sales reach, and we optimized our mining operations. I'm pleased to report that we not only met our targets, but slightly exceeded them, reaching $73.6 million in total revenue. Let me walk you through each area in detail. Innovation remains the cornerstone of our business. Our ongoing R&D investments allow us to constantly deliver high-performance products that meet market demands and drive our business growth. This quarter, we began the initial small-scale delivery of our new A15 series ahead of schedule through internal deployments and by working closely with our Foundry partners through the DTCO process. we have made substantial improvements to both performance and yield rate of the A15 series over recent months. Our top model in the A15 series, the A15 Pro, delivers 215 terahash per second of computing power with power efficiency as low as 16.8 joules per terahash. We are fully confident in our ability to scale up mass production for the E15 series. We are continuously improving and expanding our E15 product line while developing customized solutions for specific mining needs. A recent example is our partnership with CleanSpark, where we will provide a 1666i emerging cooling miners that deliver 249 terahatch per unit at base clock speeds. These comprehensive mining solutions have proven their reliability and durability, performing steadily even in the extreme heat of the Middle East. For consumer products, that target individual instances, we have combined household appliance concepts with decentralization principles. Following the success of our Nano3 product, we are developing more consumer-level products. These new offerings will make mining more accessible to the general public, helping us reach a broader customer base. The development of our H16 series is proceeding according to plan. As always, we'll announce specific details only after completing full machine testing. The H16 series will use more advanced process nodes. Through optimization and close collaboration with our partners, we aim to achieve power efficiency in the 10 plus joules per terahatch range. For our air-cooled machines, we expect efficient power to approach 300 terahatch per second. In terms of mining machine sales, primarily driven by continued mass delivery of our A14 series miners, we achieved sales of 7.3 per second in computing power. This represents a year-over-year increase of 93.8% and a quarter-over-quarter increase of 16.4%, marking our highest sales volume in the past 11 quarters. Although impacted by Bitcoin price, with the average selling price of computing power for Q3 decreased slightly with our quarter. Our strong sales volume drove product revenue to 64.58 million US dollars, the best record in the past two years. Since this last year in May, our new A15 series has received significant attention and positive customer feedback. This quarter, we successfully initiated small-scale delivery of A15 series, delivering about 1,500 units. We've also begun stocking advanced models with traditional models largely cleared out. our inventory mix has further improved. Following the US election, Bitcoin price rose, driving increased demand for mining machines. The inventory for these new models has positioned us well to meet the expected surge in customer demand. As of now, scheduled deliveries for 15 orders extended through February 2025. Our multi-dimensional cell system continues to drive global cells. In North America, we recently secured an order from the listed mining company CleanSpark for 3,800 A1566i emerging cooling miners with delivery planned for the fourth quarter. In early November, we also reached agreement with a long-standing public mining customer high for a total of 11,500 units of A1566 miners with deliveries starting in the fourth quarter. Our previous order with cipher for 6,600 units A15 is also being delivered on schedule. These partnerships reflect the process of our ongoing product promotion and sales system development in North America, with more North American customers recognizing our product performance and delivery capabilities. Following the halving, we've seen growing customer demand in regions with energy advantages, such as Asia and Africa. Our computing power delivered to these regions increased by over 50% sequentially. This quarter, we delivered over 10,814 models to customers in the Middle East. Our products have demonstrated exceptional stability in high temperature environments, expanding our brand awareness and reputation in local markets. Additionally, by the end of the third quarter, our protocol mining heater, Avro Nano 3, had accumulated orders for 17,000 units. It's over 10,000 units shipped during the third quarter. Online sales have become the primary channel for Nano 3, reaching customers in 79 countries and regions. these positive market responses. The strong sales of NanoSuite have broadened our product line, promoted our brand, and demonstrated our ability to meet diverse customer needs. Regarding our money operations this quarter, we overcame challenges posed by stagnant Bitcoin price and rapidly increasing network hash rate. Our mining revenue reached $9 million, remaining stable compared to the second quarter and also performing the industry average. Despite soft Bitcoin price in the third quarter, we managed to produce 147 Bitcoin, a 5% increase quarter-to-quarter, a remarkable performance in the industry. This growth has driven by the expansion and optimization of our mining projects in Africa, along with variable conditions during the wet season. The wet season in Africa arrived later this year, concentrated after August, which efficiently boosted our mining output this quarter. That's why network hash price hitting historical lows due to Bitcoin price fluctuations. Our mining operations still achieved a gross margin of 22% this quarter. In North America, where the regulatory environment is relatively stable and energy resources abundant, We continued active negotiations with several mining partners this quarter, making positive progress. Today, we are pleased to announce a 30 megawatt joint mining project with Luna Square in Texas, involving about 1.61 X hash per second of computing power. This deployment includes 3,480 A14 series and 5,664 A15 series units expected to come online in Q1 of 2025. Our previous joint mining venture, Stronghold, has been upgraded to 6,000 A14 series miners, totaling about 0.9 X head per second, and is scheduled to come online by this year's end. To better support our mining site and equipment in investments and sales in North America, we have been actively securing funding. Today, we announced a new US$30 million pre-folder stock financing agreement with an existing investor, which lacked their US$15 million investment in September. supports our goal of reaching 10 exahead per second deployed computing power in North America by the first half of 2025. Achieving this goal will significantly enhance our influence in North American mining community. By the quarter end, our Bitcoin holdings on the balance sheet increased to 1,231 Bitcoins. taking another record high. This not only demonstrates the steady development of our mining operations, but also reflects our strong confidence in Bitcoin's long-term value. We believe our mining operations will contribute even more significantly to our company as market conditions improve and our strategic deployment advances. On the operational front, we maintain our focus on internal improvements while facing external challenges, working to optimize management and increase operational efficiency. This quarter, we are maintaining our R&D investments. We continued prudent control over marketing and management expenses, keeping overall operating expenses streamlined at levels similar to last quarter, excluding non-cash factors such as fixed assets impairment due to the halving and Bitcoin price fluctuations, as well as changes in the fair value of financing investments. Our non-GAAP EBITDA loss has upwards 36.80 billion US dollars, narrowing 46% year-over-year. Our cash reserves reached $72 million at quarter end. This enhanced cash position enabled us to accelerate investment in A15 mass production and better support our sales, expansion, and mining projects in North America, laying a solid foundation for the company's next development phase. Looking ahead to the fourth quarter, we are making steady progress in improving the yield rate and ramping up production capacity for A15 series, which will enter large-scale delivery as planned. Recently, we secured buff orders for the A15666 model with several major publicly listed mining companies. These deliveries began this quarter and are continuing into at least the first quarter of next year. With Bitcoin price rising significantly, we have started to adjust our pricing for both spot and contract sell orders, aligning these orders with market conditions. We are also increasing the proportion of advance payments for contract sales orders. The primary R&D work for A16 series is expected to conclude this quarter. Additionally, as mentioned last quarter, we are developing a consumer-level product line With winter approaching in the northern hemisphere, we will soon unveil several new products that combine home heating with decentralized mining. These products are designed to provide both practical value and economic rewards to customers. Meanwhile, our mining business particularly in North America, continues to make progress with deployment plans underway. Through these efforts, we aim to strengthen our performance, making 2024 an increasingly successful year. Based on these comprehensive factors, we maintain a consciously optimistic outlook for the first quarter of 2024. We expect revenue for the fourth quarter to be approximately $80 million. This guideline is based on the company's current market and operational conditions, and actual results may vary. With Bitcoin's fourth halving completed, the Federal Reserve signaling rate cutting cycle, and the recent conclusion of U.S. elections, numerous market variables are becoming clear. We have seen Bitcoin price beginning to stabilize and rise recently. In North America, increasingly crypto-friendly communities are emerging. with more miners expanding their mining facilities and data centers. These are all positive factors that we observe. On the other hand, we believe the current bull market is only beginning. This is a critical period before miners' profitability explosion and reversal of computing power supply-demand dynamics. As this important market juncture, we are ready with our high-performance A15 series products for mass delivery. Meanwhile, we continue to invest in new product development to meet the diverse needs of various miners and consumer customers, maintaining ongoing investment in production capacity and future enhance our delivery capabilities. We are fully advancing our sales and partnership strategies within key markets like North America, leveraging our compliance advantages as a US listed company, actively embracing the market and participating in Bitcoin mining cooperation various faults. We are confident that together with our customers and partners, we can seize the numerous market opportunities in this full market and achieve growth together. This concludes my prepared remarks. Thank you, everyone. I will now turn the call over to our CFO James. Thank you.

Thank you, NG, and good day, everyone. This is James, CFO of Canaan. I'm very glad to share our Q3 financial results with you together with our CEO. As NG stated at the top of the call, the third quarter of 2024 was a challenging quarter, given that it was the industry's first complete quarter post-harvest. The average Bitcoin price declined by over 7% sequentially, but the total network hash rate grew by more than 10%. As a result, miners' margin was further squeezed. Facing this challenging quarter, we continued with the bulk delivery of A14 products, further improved the performance of yield and the energy efficiency of the A15 series, completed the mass production introduction for the A15 series, strived to expand the global sales and continuously optimize the operations. Let me give a quick summary of our financial performance in quarter three. First, with continuing large-scale deliveries of our A14 series, we achieved a total revenue of nearly $74 million, which beat our guidance of $73 million, marking year-over-year growth of around 121%. This was the highest revenue that we generated in the past five quarters. Moreover, our penetration into the North American market enabled some important breakthroughs. By the date of this earnings call, we have secured some significant orders for our A15 series from customers, including listed mining companies in North America, such as Hyphen and Clean Spark. Together with Cypher and Stronghold, more and more listed companies are choosing our A15 series products for their mining operations. Secondly, compared to the overall situation of the industry, our mining performance this quarter exceeded our expectations despite the unfavorable average Bitcoin price because of our ongoing expansion in mining operations. We mined 147 Bitcoins and generated $9 million of mining revenue in this quarter, with an average revenue per Bitcoin mined of over $61,000. Our self-mining hash rate reached around 4.6 exahash per second, which helped our own Bitcoin accumulate to a record high total of 1,212 Bitcoins, a sequential increase of 98 Bitcoins. We are committed to our plan of reaching 10 exahash capacity in North America in mid-2025, and we have taken some significant steps towards this target, including our upcoming collaboration with Luna Square, which added about 1.6 exahash in Texas, United States, and our collaboration with Stronghold, which added about 0.9 exahash in Pennsylvania, United States. Thirdly, our inventory balance declined significantly in this quarter and reached its lowest point in the past three years. As the percentage of inventory value from our older series sharply reduced, our inventory structure was further optimized. As of the end of quarter three, the inventory value of the A13 series was lower than 20% of the total inventory value. At this point, we are prepared to meet more of our customer needs with newer models. Let's start to take a look at the profit and the loss. As I said, in quarter three, our total revenue was around $74 million. Revenue from machine sales was around $64 million. We delivered a total computing power sold of 7.3 million terahash per second, representing a year-over-year increase of around 94%. and marking our highest sales volume in the past 11 quarters. The average selling price, or ASP, increased by 12% year-over-year, from $7.9 per terahatch per second to $8.8 per terahatch per second. Driven by the increased computing power sold and ASP, revenue from machine sales increased by around 117% year-over-year. From the product side, our large-scale delivery of A14 series contributed near 80% of machine sales revenue. The A15 series started small batch delivery in the quarter, and we have secured some significant orders for this product line from key clients in North America, such as CleanSpark and Hive. From the sales side, our multidimensional global sales system made positive progress in several key regional markets during the quarter. In quarter three, our customers from Middle East and North America contributed 39% and 16% of our machine sales revenue. Turning to the revenue from our Avalon Nano 3 mining heater, which diversified our product revenue stream. In quarter three, we delivered over 10,000 Nano 3 heaters and recognized around $1.4 million in revenue from these sales. The accumulated orders for Narrow 3 achieved nearly 17,000 units by the date of this earnings call, primarily from customers in North America and Europe. For our mining machine sales, we accrued $22.9 million for inventories write-down and prepayment write-down in this quarter, representing a year-over-year decrease The decrease was driven by ongoing stock clearance in the quarter. These non-cash write-downs are made under U.S. GAAP rules impacting our gross profit, but there is no impact on our cash balance. Excluding the above write-downs, we would have achieved a gross profit of $1.1 million for mining machine sales. The write-downs are mainly from A13 series inventory value reduction, according to the latest market price. Mining revenue was $9 million in quarter three, as a year-over-year increase of 175%. We mined 147 Bitcoins in the quarter, a year-over-year increase of 26%. This increase was primarily driven by the computing power installed for our mining business which reached 4.6 exahash per second at the end of the quarter. We also further expanded our mining business in Africa, where our installed hash rate reached 3.5 exahash per second at the end of quarter three. Our average revenue per Bitcoin in quarter three was over $61,000, which decreased by 7.5% primarily due to the decline in Bitcoin prices in Q3. Gross profit margin for our mining business was 22. Please note here that mining profit or loss is defined as mining revenues net of costs for energy and hosting without consideration of depreciation for the deployed machine. Now turning to the expenses. Our operating expenses totaled $35 million, decreasing 19% year over year. Staff costs, including share-based compensation, decreased 17% year-over-year, mainly driven by organizational optimization performed in Q4 last year. We recorded $6 million in impairment of our A13 series machines deployed in our mining operations as a result of increased Bitcoin mining difficulty post-having. Excluding this impairment, Our operating expenses were about $29 million, remaining steady during 2024. As mentioned in Quarter 1, we chose to early adopt the FASB new accounting rules on cryptocurrency assets since January 1, 2024. These new rules allow cryptocurrencies to be carried at their fair market value. The price of Bitcoin increased to around $63,500 on September 30, 2024, versus around $62,000 on June 30, 2024, contributing to an aggregate gain on cryptocurrency assets of $2.5 million during the third quarter. Despite a challenging post-harving hash price, Our Q3 operating loss was around $57 million, narrowing 50% year-over-year, and adjusted EBITDA loss, narrowed by 50% year-over-year, to $34 million. In Q3 2024, we issued the third tranche of the Series A preferred shares financing and recognized it as a convertible liability according to U.S. accounting rules. The financing incurred an excess of fair value over proceeds received and a fair value change. These non-cash accounting treatments hit our Q3 bottom line with a total $27 million. In order to represent our performance more accurately and more comparably, we exclude the impact of the accounting treatment from our non-GAAP measures. Turning to our balance sheet and cash flow, In quarter three, we received $50 million from our preferred shares financing, and we paid $30 million to secure our wafer supply. During the quarter, the cash outflow of $69 million for production and operation was offset by a cash inflow of $42 million from sales, $7 million from export VAT refunds, and $5 million from secured loans. Consequently, at the end of quarter three, we held a cash of $72 million on our balance sheet, an increase of approximately 8% compared to the end of quarter two. As of the end of quarter three, our count receivable balance was $1 million, a decrease of 83% compared to December 31st, 2023. We will continuously evaluate market demand and adopt corresponding credit policies with caution. Now turning attention to our Bitcoin assets. Bitcoins held as our own holding asset kept growing in this quarter, reaching a record high of 1,212 Bitcoins as of September 30. This is 98 more than the 1,114 at the end of last quarter. On September 30, the fair market value of our own Bitcoins totaled around 77 million US dollars. As of yesterday, at 92,000 Bitcoin price, the value of our own Bitcoin exceeded 110 million US dollars, and our HODL gain was around 64 million dollars, higher than the original value of the bitcoins that we gained from mining or other operations. This is an exciting reward for our long-term value creation and patience. In this quarter, we pledged 17 bitcoins for long-term secured loans with an aggregate carrying value of $2 million at what we believe is a reasonable interest level. The secured loans enable additional liquidity for production, expansion, and operation. We also transferred 100 bitcoins for a fixed-term product with a fixed annual return rate. In the future, under the premise of adhering to our HODL strategy, we will explore more ways to increase capital liquidity through our own derivative assets. We expect our Q4 revenues to be $80 million, which is expected to be the best quarter of 2024. We believe a friendlier environment for cryptocurrencies is coming. The Bitcoin price has been rising rapidly since November, and today's highest point is exceeding $94,000, an increase of nearly 47% compared to price before the harvest. However, the growth is still continuing to break historical highs. We believe that the rising price of Bitcoin will stimulate the profits of miners, and the demand for mining machines will steadily increase. Mining machine products with high computing power, low power consumption, and stable performance will be chosen and trusted by customers, just like our A15 series. We are expecting deliveries of new machines to be allocated to both sales mining and sales to customers. We are always strongly committed to investing in new product research and development to meet the diverse needs of various customers, promoting sales and operation strategies in key markets, such as North America, and participating in Bitcoin mining collaboration in various forms as we work to achieve our expansion goal of 10 exahust capacity in North America. We have strong confidence that we will work with our customers and partners to seize the huge market opportunities in the bull market. This concludes our prepared remarks. We are now open for questions.

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 three 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 a question to management in Chinese, please immediately repeat your question in English. To ask a question, please press star 11. If your question hasn't answered and you wish to remove yourself from the queue, please press star 11 again. Our first question comes from Kevin Cassidy with Rosenblatt. Your line is open.

Yes, thanks for taking my question, and congratulations on the good quarter. You know, you described a lot of demand picking up. How would you compare this to, say, when the having event in 2020 and then you had a very strong year in 2021? How does 2025 look like as far as visibility and demand? you know, the amount of demand you're seeing.

Thank you for the question. Overall, I think the patterns are quite similar. About six months before the halving, buyers will be motivated by lower equipment prices, tend to purchase large quantities of machines for a final wrong of pre-harvesting mining. However, demand usually drops significantly at the harvest approaches and immediately afterwards. Once the market is stabilized again and when the Bitcoin prices recover, demand technically will rebound. That said, there are some differences between the two events. The timing of having Bitcoin price trends, industry inventory levels, and overall scale of demand have all involved. Despite these differences, the key takeaway is that demand continues to grow. market fluctuations have lessened and customers have become more professional in their operations. I think for 2025 maybe some I think the capacity and like the geographic conflicts will influence the demand and different regions may have different demands in 2025. Thank you.

Thank you for that answer. And just what systems do you have in place to make sure you're going to be able to meet the demand, make sure there's no shortage of the ASICs or boundary space, and even just the assembly of the mining rigs?

Yeah, we focused on developing new products, delivering models with approximately 17 draws per terahash power efficiency this year. And we also anticipated market trends early and secured our production capacity by placing advanced orders to the foundries. Close collaboration with our partners and has further improved the yield rates and the shortened production cycles. These interactives require financial support. At the end of September, we did $60 million financing to invest in self-mining and joint mining sites in US. because we know the bull market is coming, so as well as to help our supply chain to stop us from customer orders. Recently, the Bitcoin price rising rapidly. The bull market is already there, so we secured another 30 million US dollars in financing. This reflects our advantage of being a listed company, allowing us to deploy capital swiftly to expand capacity and meet growing market demand. I think the waivers we placed in September will start to deliver in the end of this year. But usually, you know, the production will use about close to five months. We are doing everything we can to shorten the second time. The next year, performance of products we will deliver needs to improve further. I believe a range of 10 to 15 joules per terahatch is achievable. This requires continued investment in chip development and I expect most of the design work of A16 products to be completed this quarter. And additional to the chips, we also have to refine the entire product ecosystem. This includes machines of different power levels whether targeting B2B or 2C customers, different cooling methods, system and solution integration, as well as both software and hardware. Over the past few months, we have conducted extensive product development work, and this will continue in the coming months. Thank you.

Yes, thank you.

Thank you. Our next question comes from Nick Giles with B Raleigh Securities. Your line is open.

Hey, good morning, everyone. Congratulations on the recent deals with North American customers. I was wondering if you could expand on your growth efforts in this market. What targets do you have in the coming quarters, either on an exahash sold basis, gross revenue, or percentage of total revenue?

I'll start there. Thanks. Thank you.

I think the rising B1 price has triggered a recovery in market demand. and we anticipate even stronger demand next year. The third quarter we achieved 7.3 million terahash per second in computing power sold, marking a 93.8% year-over-year increase and 16.4% screenshot growth. taking a record high over the past 11 quarters. Recently, we announced large-scale orders with North American publicly-traded mining companies, creating growth and hype, reflecting a notable recovery in demand. As the Bitcoin price surpassed 85K, We began adjusting our sales prices in line with fair market value and increasing the upfront payment required for contract shareholders. We believe Bitcoin bull market will still be in the early stages and moving forward we will flexibly so that our pricing policies and sales strategies to align with evolving market supply and demand dynamics. Thank you.

Thank you for that, NG. My next question is just around R&D spend expectations in 2025. How should we think about the split between an A16 series and other initiatives such as your Kendrite series? Thank you.

I think we focus on our minor theories development. But for the AI side, we I think I have something, I can say something about this. Yeah, let me see. Okay, I think for our company, in the past few years, I have closely monitored advancements in AI. and had discussions with industry leaders about the direction of this rapidly evolving field. In the last two years, I think Aledia and its ecosystem have emerged as clear winners. This is all about my personal opinion. So capturing the And I think they are capturing the majority of profits. This reminds me of Bitcoin mining boom that began in 2011. So the question is, how can Canon position itself to ride this wave of technological process, one that could define the next 10 or 20 years? Kinect has a strong foundation in areas like the HAI product development, the Kinect series you just mentioned, chip design and operational computing infrastructure. This gave us multiple avenues to participate. Making the right business decisions requires foresight. So today, I think the demand for large network model training is already consolidating among a small number of major companies. In just two or three years, there might be fewer than 10 companies globally comparable that have related to training foundation large models. That means the competition in large model training hardware is essentially over. and the winners are already clear. So the next major opportunity will likely emerge with AI applications based on these models become mainstream, leading a sharp increase in demand of inference computer power that exceeds training requirements. However, the shift will take time. At this stage, it would be wise to invest heavily in designing and producing, especially for producing the chips and devices specifically for today's last models. I think we should not remain idle. This year, we have seen clear coverage between AI computing and the cryptocurrency mining. Both really relate to computation to generate tokens, right? So LBAT with different algorithms. AI algorithms are typically more complex, but as the number of foundational models decreases, the issue of regimented software will disappear, I think. So making ASIC-based solutions for AI will be more feasible. So our best preparation right now is already underway, accelerating infrastructure deployment, particularly in regions like North America. By the middle of next year, we aim to deploy 200 megawatts in the first phase and continue to expanding power resources afterward. The current Bitcoin four-year cycle has just begun and I believe this is the last window for us to lay a solid foundation. So looking ahead, one of our goals in four years is to provide computer services at the lowest possible CAPEX and OPEX, not only for Bitcoin mining, but also for other applications using ASIC optimized hardware tailored to new markets. This is my long-term vision, so our immediate focus over the next one or two years is very straightforward on deploying more infrastructure to build a strong foundation for the future. Sorry for the long answer. Thank you.

Angie, I really appreciate all the color and commend you on the foresight in this segment. So continued best of luck.

Thank you. Our next question comes from Kevin DD with HC Wainwright. Your line is open.

Hi, NG. Hi, James. Thanks for having me on the call. NG, I was hoping you could look a little bit at the 814 versus 815 series and the demand you're seeing. Obviously, with the increase in compute density, heat becomes a greater issue. And I'm wondering what you're seeing on the demand side for air cool versus immersion as your orders shift from A14 to A15? Okay.

Firstly, hello. I think the A14 series is very close to the EOL phase because the A15 has much more advantages. The power efficiency of the A14 is about 22 to 23 GHz per hash and the A15 is now today is lower than 17, so there's I think more than 20% improvements. So we are switching all of our capacity from A14 to A15. And for demand side, I think the A15 is much, the demand is much bigger. Because the performance is comparable to our competitors. And the machine is super stable. We test it under over 50 degrees Celsius by our air cooling system. And in our laboratory, the water cooled liquid cooling system is running close to 400 terahash today. So everything is much better. So for the machines cooling method, I think that the liquid cooling model is increasing. I think the reason is some of our customers is trying to use the machines to generate heat, especially in the winter. So we have multiple customers working with us using our liquid cooling models to generate hot water, and the temperature is from 55 degrees Celsius to over 70 degrees Celsius. It's a very valuable equipment in many different regions. Also, I think after that, because the data center or mining, sometimes it's very noisy. to operate with lower noise is also a very important requirement for our customers. So this also led them to switch to the liquid cooling. I think the water cooling model is very important. So at the end of this year, I think we have plans to announce the liquid, the water-cooled system to the public, maybe in the next month or January 2025. Thank you.

And, G, thank you for all the color on AI development. I appreciate your perspective immensely, as you know. I'm curious, though, do you think you're going to hold back to further development until you see a path to develop an ASIC to address that market? I just want to make sure I understood your comments correctly. Thank you very much.

For this question, by my personal reveals, I think today the model training is using the NVIDIA system like A100, H100 or some more advanced models. But most of the inference customers is using the A6000 and A490s. So this remind me that in the very early stage of Bitcoin mining, people use CPU to mine Bitcoins and rapidly they switch to GPUs. They use GPUs to mine Bitcoins. So today the stages is the AI players is using GPUs to mine or you can say it to generate tokens. So we are currently at this stage. Yes, personally, I have plans to do something on how to generate AI tokens by using the ASIC technology, yes. But I think what is the disadvantage is today, the inference demand is not come over the training demand. This is what I'm seeing today. So, as I just mentioned, to invest a lot of cash in the next one or two quarters to this kind of AI ethics is a wise movement. So I will continue to look closely to this industry. Yeah, thank you.

James, one quick question for you. I understand the Bitcoin loans you've made still have $1,200 plus Bitcoin. How do you see using that Bitcoin? Do you think you might offer more loans? And how are you evaluating your counterparty risk?

Thank you, Kevin. I think that's a wonderful question. I think as a listed company, we are very proud to be listed in NASDAQ. So we do have the access to the capital market. So for the company, usually we have different methods of doing fundraising, just like what we have demonstrated in the past. We can do preferred shares. We also can do at-the-market offerings. and also we can use our Bitcoins to generate liquidity. So if asking me this question, to be very honest, we just usually balance between all those possible methods. Usually we would like to take preferred shares because it's easy and it's quite transparent. And then sometimes if the market demand is strong, ATM may be more suitable. And last but not least, I think currently Bitcoin price is increasing to all-time high. Of course, we can consider, you know, using more Bitcoins to do pledge. But of course, we have to consider, you know, to utilize these Bitcoins for other methods of generating cash flows. for example doing some financing to generate interest is also something we are testing. So I think currently we are still learning in this all kinds of methods. We haven't yet fixed in whatever terms how we do this fundraising. Of course we can try all the methods and then our shareholders can provide more suggestions to us to fully consider what's the best for our shareholders. I think that's the purpose of doing all this fundraising. Thank you, Kevin.

Thank you, James. Appreciate it. Congratulations on the quarter.

Thank you.

Thank you. Our next question comes from Mike Grondel with Northland. Your line is open.

Hey, thanks, guys. For 3Q product revenue or the A6, can you break that down between the A14 and the A15? And then roughly your $80 million guidance for the December quarter, could you break that down roughly between the A14 and the A15? I think...

For this question, I will take this question, Mike. I think the major delivery of Quarter 3 is from A14 series. NG has mentioned that we only delivered like 1,500 pieces of A15 series. So the major delivery is from A14 series. And also, we did a lot of stock clearance for A13 series, also occupies a good kind of percentage, but I think the major part is still A14 series. And the deliveries to different geographies is mainly Middle East and North America. Does that answer your question, Mike?

Yeah, that was the 39% to the Middle East and 16, I think, to North America. And then roughly in 4Q, you know, you're forecasting $80 million of revenue. What's the split between A14 and A15 going to be?

Yeah. I think currently the A14 series is still doing ongoing delivery. I think it still consists of, you know, it's still a major part of our delivery. But A15 series is climbing the, you know, in a kind of introduction period, and in this quarter, in quarter four, we will still have A14 series as the major delivery, and we will have the first mass production batch of A15 delivered to the main customers from North America, like Cypher, CleanSpark, and Hive. So that will be this quarter's look like. So if asking me about percentage, I would say A14 series still occupies the biggest percentage, and then rest go to A15. And we still have some A13 to clear, but the value is quite relatively smaller.

Got it. And just to follow up to that, roughly how much of A13 inventory is sitting on the balance sheet?

If you calculate the inventory, you can consider 20% of the inventory value is now A13 service.

Okay. And then just lastly, do you have a rough pro forma cash balance and share count after the recent financing? You said the cash balance.

I don't know if I answered this question.

Yeah. Mike, we have all disclosed our shares outstanding in our earnings release as of today. What's the question again? Mike, are you asking for the cash balance?

Yeah, after the recent financing that you guys talked about, I think it was the preferred. If you just have a pro forma cash balance after that financing.

Yeah, I think the $30 million is just happening today. We haven't yet received all the cash. Hopefully, in the end of this week, or next week we can receive that $30 million cash. But the previous $50 million in the last tranche of previous preferred shares have already been received in the end of September. So it's counted to the $72 million cash balance in the end of September. Does that answer your question, Mike?

Yeah, we would take that $72 million plus $30 million for this new financing minus anything for operations and whatnot. I'm just trying to run that forward a little bit. Yeah.

Yeah, you can calculate based on that. But of course, in this quarter, we will invest more in operations, not only about the waiver supply, but also we are going to invest together with Luna Square in West Texas to do the mining site buildup.

Got it. That's helpful. Hey, thank you.

Thank you, Mike.

Thank you. That's all the time we have for questions. I'd like to turn the call back over to the company for any closing remarks.

Thanks again for joining us today. If you have further questions, please feel free to reach out to us directly or through the contact information that we have on our website. Thanks, Operator.

You're welcome. Thank you. That concludes the call today. Thank you everyone for attending. You may now disconnect.