Intchains Group Limited

Good day, ladies and gentlemen. Thank you for standing by and welcome to the InChains first quarter 2023 earnings conference call. This conference is being recorded today, Wednesday, May 24, 2023. If you have any objections, you may disconnect at this time. Joining us today from InChains is the company's Chief Financial Officer, Mr. Chao-Wei Yan. On our call today, Mr. Yan will give you an overview of the company's performance and the details of the company's financial results. After that, we will conduct a question and answer session to take your questions. During the question and answer session, Mr. Yang will deliver their answers in Chinese and the company's representative will provide corresponding English translations. Before we continue, I would like to remind you that some information discussed on this call will contain forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties and are based on the company's current expectations and projections about the future events that the company believes may affect its financial condition, results of operations, business strategy and financial needs. The company undertakes no obligation to update or revise publicly any forward-looking statements to reflect subsequent occurring events or circumstances or changes in its expectations, except as may be required by law. Although the company believes that the expectations expressed in these forward-looking statements are reasonable, it cannot assure you that such expectations will turn out to be The company cautions investors that actual results may differ materially from the anticipated results and encourages investors to review other factors that may affect its future results in the company's registration statement and other filings with the SEC. With that, I'd like now to turn the call over to Mr. Chow Wai-Yan, the company's CFO. Mr. Yan, please go ahead.

Thank you. Thank you operator and everyone for joining InterChance earnings conference call for the first quarter of fiscal year 2023. In today's call, I will provide an overview of our performance and the detail of our financial results for the first quarter of fiscal year 2023. After that, I will conduct a Q&A session to take your questions. First of all, before we begin the performance review of the company, I would like to give a brief introduction to Interchange, an up-and-coming young blockchain company. Interchange is a fast-growing provider of high-performance computing asset chips and ancillary software and hardware, which are primarily used in the field of cryptocurrency mining. From the beginning of our entrepreneurship, we chose diversified asset chips as our entry point into the blockchain or Web3 industry. and we define ourselves as practitioners of such industry. We firmly believe that the Web3 industry is still in its early stage, and the POW, or proof of work based mining activity, which our asset chiefs are utilized in, is the important part of the overall blockchain industry. We also believe that in the future, the technical forms of consensus mechanisms in the Web3 industry will continue to diversify as the industry keeps innovating. The trade provides us with new industry opportunities as well as the possibilities. We position ourselves as a provider of Web3 infrastructure, leveraging our core competency in realization of HPC or high-performance computing chips based on advanced technology and of compatible software and hardware system to offer diverse support for blockchain hardware and software products. We serve a wider range of blockchain applications. This is where our expertise lies. Although the industry may experience short-term fluctuations, we believe that our research and development capabilities and industry vision will enable us to seize long-term industry opportunities. Okay, with the background, now let's start reviewing our performance for the first quarter of 2023. Although the overall cryptocurrency market has rebounded in the first quarter of 2023 as compared with the previous quarter, it still remained in a bear market. Our business remained closely tied to the fluctuations of the cryptocurrency market. We adjust our sales price to cope with the decline in cryptocurrency price, resulting in a decrease in product GP margin from 85.7% in the first quarter last year to 49.1%. However, The GDP margin in this quarter has started to recover when compared to 40.6% GDP margin in the first quarter of last year, which is consistent with the first quarter market trend in the overall cryptocurrency market. As I mentioned in last earnings conference call, we maintained profitability for this quarter. Despite the challenging market conditions, with sales revenue of RMB 26 million and net profit of RMB 4.7 million, resulting in a net profit margin of 18.2%. This is in line with management's expectations. Of course, we continue to have a strong balance sheet with $111 million of cash and cash equivalents, which counted for 77% of our total assets as of March 31, 2023. Our total liability amounted to $2 million and our asset to liability ratio was 1.4%. We achieved several key milestones in this quarter. We completed our initial public offering in the NASDAQ in March, 2023. In addition, we initiated our business expansion in Singapore in this quarter by dispatching members of senior management to station in Singapore and entering dialogues with potential local distributors for cooperation. We also discussed industry opportunities and the regulatory trade in Singapore with local Web3 industry practitioners. Next, we will continue to adhering to our development strategy. actively expand our efforts in the research and development of our XIHE platform and Wanshu platform, as well as other related new products, and developing our business in Singapore. In the future, our new business lines in blockchain industry will gradually emerge, which will be completely different from the current ones. This is not our first encounter with the market downturn. We firmly believe that such downturns only serve to make us stronger, much like other best companies. At the end of previous downturn cycle in 2020, we only had a product with four algorithms. Now, in 2023, we have products with eight algorithms and each product has underwent multiple iterations. Furthermore, we have a stronger balance sheet and more extensive industry knowledge, as well as more globalized presence than ever before. With the entire industry showing signs of recovery, we will keep dedicating ourselves to the blockchain field. Pay attention to industry trends and risks and seizing opportunities. We believe our efforts will lead to meaningful progress of the company's business growth. Now, I will provide a brief financial overview of our first quarter of 2023. Our revenue was down 83.1% to RMB 26 million or US dollar 3.8 million in the first quarter. Such decrease was primarily attributable to the continued broader decline of cryptocurrency market which caused the decrease in the sales volume and average sales price of our asset chips that were primarily used in cryptocurrency mining machines. Cost of revenue was down 40% to RMB 13.2 million or US dollar 1.9 million in the first quarter, which was in line with the decrease in the sales volume of our asset chips. Total operating expense was up 43.3% to RMB 14.2 million or US dollar 2.1 million in the first quarter. Primarily due to the increase in both research and development expenses of the design of the ASIC chips and the general and administrative expense, which was due to professional expenses, which was due to the increase of professional expenses. Research and development expenses was up 68.6% to RMB 8 million or US dollar 1.2 million in the first quarter, primarily due to the increase in labor and the material cost of the design of the ASIC chips. Sales and marketing expenses was up 9.8% to RMB 1.3 million or US dollar 0.2 million in the first quarter. General and administrative expenses were up 23.2% to RMB 4.9 million, or US dollar 0.7 million in the first quarter, primarily due to an increase in labor costs and professional expenses, partially offset by the decrease in taxes and surcharges. Interest income was up 79.1% to RMB 3.5 million, or US dollar 0.5 million in the first quarter, primarily attributable to an increase in our average cash balance. Other income was down 54.3% to RMB 4.1 million or US dollar 0.6 million in the first quarter, primarily due to a decrease in government grants we received from local government. Such government grant was granted to us to support a qualified project of IC industry with no repayment obligations. As a result of the forward going, our net income was RMB 4.9 million or US dollar 0.7 million in the first quarter. Our basic and diluted net earning per ordinary share was RMB 0.04 or US dollar one cent in the first quarter. Each ADS represents two of companies class A ordinary shares. We remain confident in our technology and business. Looking ahead, we will continue to exact our long-term development strategy and seek growth opportunities in our business. Thank you for your continued support, and we look forward to updating you on our progress in the future. Now, I'd like to turn the discussion over to operators for any questions.

Thank you. Ladies and gentlemen, at this time we will begin the question and answer session. If you would like to ask a question via the phone, simply press the star key followed by the number 1 on your telephone keypad and then wait for your name to be announced. 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 question in English. For the sake of clarity and order, please ask one question at a time. Management will respond and then feel free to follow up with your next question. We will now pause momentarily to assemble our roster. Your first question today comes from Eva Moore, who is a private investor. Please go ahead.

Hi, management team. I got one question today. My question is, how do you see the industry competition you are facing and how do you address it? Thank you.

Okay, thank you for your question. My name is Daniel. I will help to do the translation for both parties. Now, Mr. Yang, please prepare answering the first question. 请问言总,贵公司如何看待当前所面临的市场竞争环境以及如何应对?

For the blockchain industry that our company is engaged in, we will prioritize the innovation and continuous development of the entire industry, rather than the competition between manufacturers or the advanced technology between the manufacturers and the chip. We think that the biggest challenge of the blockchain industry is the imperfect management and the new blockchain applications and the existing social industry.

For blockchain industry, currently we are prioritized promoting industry innovation rather than competition in advanced chip technology among manufacturers. The greatest challenges, as we recognized, are inadequate supervision and the exploring of business model To integrate the new blockchain application into existing social and industry ecosystems.

As for computing chips, there is a competition between different algorithms and different technologies. In contrast, it is only the chip design technology level or the chip manufacturing technology level that we think is more important for the fundamental understanding and value re-creation process of blockchain applications.

For computing chips, the competition among different algorithms and technologies are limited to chip design and chip manufacturing technologies. From our point of view, what is more important and key to competition is the understanding of the instance of blockchain applications and the process of value recreation.

Our team has advanced blockchain industry knowledge Our team has leading knowledge in blockchain industry.

So there are plenty of opportunities and many industry niches available to us in blockchain application. Currently, we believe it is more important to us to extend technology boundaries to be capable of researching and developing more cross-disciplinary technologies. We firmly believe in and are looking forward to interchange group seizing new opportunities to make a breakthrough in this market. Thank you. Mr. Yang has finished answering the question. Please move to the next.

Thank you. Your next question comes from Irina Martins, who is a private investor. Please go ahead.

Thank you very much. My question is, could you share some detailed updates on your business expansion in Singapore, as well as on your new R&D project?

Thank you for your question. Mr. Yang, please prepare answering the second question. Thank you. Mr. Yang, please prepare answering the second question.

The Web3 industry is a globalized industry, and Conglian is always in the process of globalization. Since February of this year, the company has sent senior managers to live in Singapore, and have deep communication with relevant industries and entrepreneurs in Singapore. Through communication, we have discovered some retailers who are willing to cooperate further, and they are further expanding our customer base.

As part of the Web 3.0 industry, which is a highly globalized industry, we have been promoting our global deployment. Since February 2023, we have sent senior management personnel to be stationed in Singapore, and we have in-depth conversations with Singapore's industry practitioners. With this conversation, we have identified some distributors who are willing to cooperate with us and further expand our client base.

In the future, we will explore more business lines and not limit ourselves to existing products. Product layout is the direction we insist on and the trend of future development. And using Singapore as the starting point of our global layout to serve more extensive blockchain applications is also our industry opportunity.

Moving forward, we will explore more business lines, not limited to our existing product. Since we see a diversified product portfolio as our development direction and a future development trend, our globalization, starting from SYNCHR, will enable us to extend the application of our blockchain technologies and take full advantage of industry opportunities.

In terms of new development projects, we believe that based on Proof-of-Work, PoW's digital currency mining is an early blockchain application infrastructure, including Bitcoin, Litecoin, Dogecoin, and Ethereum before the change of the consensus mechanism. High-performance blockchain chips serving the PoW consensus mechanism are part of the blockchain industry. In terms of new R&D projects, we will focus on POW as we believe cryptocurrency mining based on POW is the key infrastructure for early application of

blockchain technology, such as Bitcoin, Litecoin, Doge, and Ethereum before it switched to PoS constants and mechanisms. High-performance computing chips for PoW constants are a part of the overall blockchain industry. As the industry continues innovating, the technical forms for constants are also becoming more diversified. which provides new industry opportunities as well as uncertainties and possibilities.

Based on this, we will establish our own core competitiveness based on our own high-performance chip realization and corresponding software system realization to provide more diversified blockchain software and hardware product support. This is our professional ability and opportunity. Our current network platform is also doing research and accumulation in this area. Therefore, we will focus on our core competency, which include realization of high-performance computing chips based on advanced technology and off-capable software and hardware systems.

This is where our professional capability and opportunity lie. We are also doing relative research for our Wangshu and Shihu platforms to accumulate knowledge in this area. From the product perspective, POW products are still our key business line and the source of revenue in the short term. Well, we are increasing the investment in other blockchain business. Thank you for the answer from Mr. Yang and your careful listening. Let's move to the next question.

Thank you. Your next question comes from Oscar Tracy, who is a private investor. Please go ahead.

Thank you for taking my question. Do you have specific plans for international acquisition or mergers, especially in Singapore? Thank you.

Thank you for your question. Mr. Yang will prepare to answer your question. Mr. Yang, do you have any specific overseas, especially Singapore, acquisition or acquisition plans?

Because the blockchain industry is relatively early, there are a lot of new teams and projects that are continuing to emerge. We recognize the expansion of the company's business through acquisition and acquisition.

Since the overall blockchain industry is in its early stage of development, and there are many emerging teams and projects, we acknowledge Merge and Acquisition as approach to accelerate business expansion. We are evaluating the principles and strategies for implementing this expansion model, and we will provide a comprehensive report at a proper time. Thank you for the answer from Mr. Yang. Please move to the next question.

Thank you. Once again, if you would like to ask a question, you'll need to press star, then 1. The next question comes from David Lampath from JZ Capital. Please go ahead.

Hi, thanks for taking my question. What is the second quarter revenue guidance and also do you see it turning up within the next couple quarters here? Thank you.

Thank you for your question. Mr. Yang will prepare also your questions. 请问言总关于公司2023年二季度的财务指引。

Thank you very much for your question. Our company is in the critical stage of diversification of business. In addition to the high volatility of the cryptocurrency industry, it is very difficult for us to predict the company's performance trend accurately. And it may not make much sense to compare our performance in the long term. It should not be used as a future performance indicator. Our research capability allows us to can choose the right industry window period to quickly develop products suitable for industry demand. This also makes our financial performance at the current stage of the industry difficult to predict accurately. But we are confident that the efforts of the current stage will definitely produce results. Once the industry recovers, we will be able to seize the opportunity of the industry as soon as possible.

Our company is at a critical stage of diversifying our business. With the high volatility of the cryptocurrency industry, it's difficult to predict our performance accurately. Moreover, comparing our performance period by period may not be meaningful and it should not be used as a future performance indicator. However, our R&D capabilities allow us to develop products that meet the industry demand quickly during appropriate industry window. This makes it difficult to accurately predict our financial performance during the current industry cycle stage. But we are confident that our current effort will allow us to seize opportunities very fast and get a good performance if the market is recovered. Thank you for the answer from Mr. Yang. Let's move to the next question.

As there are no further questions at this time, let me turn the call back over to the company's Chief Financial Officer, Mr. Yang, for any closing remarks.

Okay. Thank you very much for joining this conference call. If you have any questions, please contact us through email at ir.interchange.com or reach our IR console, Accent Investor Relations at tinashow.incentir.com. Management will respond to your questions as soon as possible. We appreciate your interest and support in Interchange and look forward to speaking with you again next time.

Thank you for attending InChange's first quarter 2023 earnings conference call. This concludes our call today, and we thank you for listening. Goodbye.