Canaan Q3 2023 Earnings Report

Canaan EPS Results

• Actual EPS: -$0.47
• Consensus EPS: -$0.36
• Beat/Miss: Missed by -$0.11
• One Year Ago EPS: N/A

Canaan Revenue Results

• Actual Revenue: $33.32 million
• Expected Revenue: $30.00 million
• Beat/Miss: Beat by +$3.32 million
• YoY Revenue Growth: N/A

Canaan Announcement Details

• Quarter: Q3 2023
• Date: 11/28/2023
• Time: N/A
• Conference Call Date: Tuesday, November 28, 2023
• Conference Call Time: 8:00AM ET

Canaan (NASDAQ:CAN) Inc is a China-based technology company specializing in the design and manufacture of high-performance computing hardware for the digital currency and blockchain industry. The company’s core business revolves around application-specific integrated circuit (ASIC) miners, which are purpose-built machines optimized for cryptocurrency mining. By focusing on energy efficiency and processing power, Canaan’s mining rigs aim to deliver competitive hash rates while managing power consumption in large-scale operations.

The flagship product line, known as AvalonMiner, encompasses a range of models tailored to different scales of mining activity, from small-scale hobbyist setups to industrial farms. Each AvalonMiner model integrates custom-designed chips, cooling systems and firmware to maximize uptime and mining efficiency. In addition to hardware sales, Canaan supports its products through firmware updates, technical support and a suite of monitoring tools that enable operators to track performance metrics and temperature thresholds in real time.

Canaan was founded in 2013 and is headquartered in Beijing, with research and development facilities and assembly centers located in key manufacturing regions of China. The company completed its initial public offering on the Nasdaq stock exchange in November 2019 under the ticker symbol CAN. Through strategic partnerships and distribution agreements, Canaan has expanded its sales footprint across North America, Europe and parts of Asia, serving a diverse customer base that includes individual miners, data center operators and mining pool collaborators.

Under the leadership of founder and Chief Executive Officer Nangeng Zhang, Canaan has pursued a technology-driven growth strategy, investing in chip design expertise and production scalability. The management team comprises veterans in semiconductor engineering, supply chain logistics and firmware development, all aimed at reinforcing Canaan’s position in the competitive crypto-mining hardware sector. Going forward, the company continues to explore adjacent opportunities in high-performance computing and blockchain infrastructure services.

Canaan Q3 2023 Earnings Call Transcript

Key Takeaways

• In Q3, Kannon reported $33.3 M in revenue to beat its guidance of $30 M despite a 54.9% QoQ decline driven by lower ASPs.
• The company launched its 10th-anniversary A14 series with air-cooled A1466 (150 TH/s, 21.5 J/TH) and liquid-cooled A1466i (170 TH/s, <20 J/TH), securing ~2 PH/s in presales.
• U.S. GAAP inventory write-downs and provisions of $53.9 M led to a net loss of $80.1 M in Q3, even though these noncash charges did not affect cash flow.
• Suspension of 2 EH/s operations in Kazakhstan cut mining revenue by 79.5% QoQ to $3.26 M, but obtaining the Type 2 license in mid-November paves the way for year-end resumption.
• The company ended Q3 with a record 860 BTC (≈$31 M) on its balance sheet and announced up to $125 M of convertible preferred share financing for R&D and capacity expansion.

Presentation

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to Canaan Inc.'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 would like to hand the conference over to your speaker host today, Mr. Clark S. Soucy, Investor Relations Director of the company. Please go ahead, Clark.

[Clark S. Soucy, Director of Investor Relations at Canaan Inc.]

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. Nangeng Zhang, and our CFO, Mr. James Jin Cheng. In addition, Mr. Leo Wang, IR Senior Director, Ms. Xi Zhang, IR Manager, will also be available during the question and answer session. Mr. Zhang will start the call by providing an overview of the company and performance highlights for the quarter. Mr. Cheng 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.

[Clark S. Soucy, Director of Investor Relations at Canaan Inc.]

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 20-F, for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such statements.

[Clark S. Soucy, Director of Investor Relations at Canaan Inc.]

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. Nangeng Zhang. Please go ahead, sir.

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

Hello, everyone, this is NG, the CEO of Canaan. 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 $30,000 and it reached its quarterly low point of around $25,000 in September. It then stayed in the range of $25,000-$27,000 until the end of the quarter. During the third quarter, the total network hash rate remained fairly stable at around 400 EH/s. Miners faced slim profit margins, and there was a lack of motivation and not enough capacity for further investment and expansion of mining computing power.

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

At the macro level, the U.S. 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 the 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 iteration, promoting multi-channel sales strategies, and exploring mining partnerships.

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

We also maintain 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 the investment in production capacity. This allows us to upgrade our products to achieve breakthroughs in machine hash rate performance and energy efficiency. During our tenth anniversary event in mid-September, we officially launched our new generation of mining machine, the A14 series. The air-cooled A1466 achieves a hash rate of 150 TH/s, with a power efficiency of 21.5 J/TH.

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

At the same time, we introduced the liquid-cooled A1466I mining machine, which achieves power efficiency below 20 J/TH for the first time, and has 170 TH/s of computing power. Besides our current offerings, we are actively developing new products. Follow our usual practice, we will announce their performance once the machine testing is complete. We believe these products in the pipeline will align with the with next year's market mainstream production power efficiency level of 10-20 J/TH. We are also in the process of delivering our air-cooled and liquid-cooled integrated site solutions, which we have developed in-house. These include a 40-foot and a 20-foot air-cooled mining box container products, and a 40-foot liquid cooling iron box mining container products.

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

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 terahash 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 back orders to Stronghold, a listed mining company. In Southeast Asia, our computing power sales reached 1.3 million terahash per second.

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

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 TH/s 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 with 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 TH/s from customers worldwide. In addition, our multi-channel sales efforts are bringing the planned destocking of our A12 and below traditional models closer to completion as expected.

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

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 U.S. As a result, mining revenue for this quarter declined to $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.

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

Notably, the latest batch of 2,000 of our A1346 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 EH/s computing power deployed. We also hold 860 Bitcoins owned by us, reaching a historical high with a current market value of over $30 million. 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 also been addressing some previously announced issues.

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

In Kazakhstan, 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 U.S. 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 out legal procedures to protect our legitimate rights. The market environment in the third quarter was challenging.

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

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 bull 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 headcounts 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.

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

However, this adjustment also result in some non-cash provisions and impairments, leading to a considerable loss of this quarter. In terms of financing, we announced today a sale of convertible preferred shares of up to $125 million, subject to customary closing conditions with an institutional investor. This deal ensure we are able to carry out R&D and the mass production of new product in case of tightening cash flow amidst the bear market. This safeguards our product supply and the 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. Riley as the new sales agent. Looking ahead, the Bitcoin price has been a notable rebound since mid to late October, which is encouraging.

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

We are closely monitoring the market and flexibly adjusting our sales strategy and the 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 U.S. Federal Reserve seems likely to keep interest rates high for a while, and rate cutting cycle may not happen for some time. The financing and the operating cost of our downstream miner customers remain high, and the basic landscape remains unchanged. Additionally, with the Bitcoin halving approaching, market sentiment will likely be more cautious. Taking these factors into consideration, I believe that the fourth quarter has shown signs of improvement compared to the third quarter. However, we shouldn't expect the best case scenario of rising both rising price and volumes to happen quickly.

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

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 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.

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

In light of current industry and the market environment, we believe that the development of our AI business should take a more defined, independent, and a 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.

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

We have constantly improved our technical and operational capabilities to face and resolve these issues. Amid this, 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 progress in the regulatory environment, the divide between the general public and the 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.

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

At the same time, we will support Bitcoin system and a range of other, beneficial activities with robust computing power. We will continue to deliver superior products and the services to our customer, while contributing to, societal, progress. Thank you, everyone. This is, this concludes my prepared remarks. Thank you. I will now turn the call over to our CFO, James. Thank you.

[James Jin Cheng, CFO at Canaan Inc.]

Thank you, NG. Good day, everyone. This is James, speaking at our Singapore headquarters. As NG started the call with, I would like to say the market environment in the third quarter of 2023 was still unfavorable. First, after Q1's surge and Q2's calmness, Bitcoin price in quarter three showed a downward trend. It declined from $30,000 in July to about $25,000 in September, even though climbed near to $27,000 by the quarter end. Secondly, the miners' profits were still limited by the high level of total networking computing power around 400 EH/s, and the miners' purchasing power was weakened by the high financing interest cost. Thirdly, along with the product upgrading, the price competition among mining machine manufacturers was more fierce, especially the price of older generation machines continued to decline.

[James Jin Cheng, CFO at Canaan Inc.]

These factors should be considered when analyzing our Q3 numbers. Despite the market downward volatility, geopolitical headwinds, regulatory changes, and other unfavorable factors from operation, we continued to execute our strategy and delivered the results through continuous investment in R&D, multiple channel sales development, and prudent cash flow management. Let's start with profit and loss. Overall speaking, in quarter three, total revenue generated was $33.3 million, which beat our guidance of $30 million, but down 54.9% quarter-over-quarter. Our revenue from machine sales was $29.8 million, and our mining revenue was $3.3 million.... Regarding our machine sales, we delivered a total computing power sold of 3.8 million TH/s, representing a year-over-year growth of 8.7%, but a sequential decline of 38.7%.

[James Jin Cheng, CFO at Canaan Inc.]

The average selling price declined from $9.5 per terahash per second in quarter two to $7.9 per terahash per second in quarter three. The decrease in ASP was mainly due to the reduction in the selling price and the increase in the sales proportion of A12 series in terms of stock clearance. Considering both factors of power sold and ASP, our revenue from mining machine sales was $29.8 million, decreased 48.5% from $57.8 million in the last quarter. Specifically, for our mining machine sales, we accrued $53.9 million for inventories write-down, prepayment write-down, and provision for reserve for inventory purchase commitments in this quarter. The inventory write-down was recorded based on most recent subsequent selling price, when we offered further price concessions for A13 series.

[James Jin Cheng, CFO at Canaan Inc.]

Those write-downs and provisions are made under U.S. GAAP rules, jeopardizing our gross profit and making the quarterly loss bigger, but do not impact our cash status. If the above write-downs and provisions were excluded, we would have a gross profit for our mining machine sales of $1.1 million and a gross margin of 3.9%. Turning to our mining business, our mining revenue was down 79.5% quarter-over-quarter and down 64.6% year-over-year. As we announced in August, we temporarily shut down 2 Exahash of our mining computing power in Kazakhstan since July to ensure legal compliance. It caused our total deployed hash rate to decrease to 4 Exahash per second, and our installed hash rate to decrease to 1.9 Exahash per second in this quarter.

[James Jin Cheng, CFO at Canaan Inc.]

As NG previously stated already, by our active working with local partners and the local government, we've already obtained all the relevant licenses in mid-November. Despite these effects, we mined 117 bitcoins in this quarter and achieved 14.5 bitcoins for mining profit. Gross profit margin reached 10% for our mining business in this quarter. Please note here that mining profit or loss is defined as a proportion of mining revenues, deducting costs for energy and hosting in terms of mining revenues without consideration of depreciation. Shifting to our AI business. AI revenue was $0.2 million in this quarter.

[James Jin Cheng, CFO at Canaan Inc.]

As NG mentioned, we are now restructuring the AI business as a more independent business segment from mining machine and the self-mining business, which could benefit our long-term development as well as open the possibility for AI to conduct independent financing. Now, let us look at the expenses. Our R&D expenses were $17.2 million in this quarter, compared to $17.9 million in the last quarter, and $17.6 million in the prior year period. Our sales and marketing expenses were $2.5 million, compared to $2.4 million in the last quarter, and $2.1 million in the prior year period.

[James Jin Cheng, CFO at Canaan Inc.]

Our general and administrative expenses in this quarter were $21.9 million, compared to $26.4 million in the last quarter, and $21.7 million in the prior year period. Our operating expenses totaled $43.8 million, remaining year-over-year stable and decreasing 10.7% quarter-over-quarter. The sequential decrease was mainly attributable to the reduced staff costs. We have recently optimized and adjusted our organization through a series of measures, including reducing total headcounts, increasing operational efficiency, and lowering operating cash flows. These measures are a move that can help us with near-term operating leverage against the fierce competition. The effects of these measures will begin to be reflected in our operating data from quarter one, 2024.

[James Jin Cheng, CFO at Canaan Inc.]

The net result of the foregoing was an operating loss of $112.8 million for this quarter, compared to $119.1 million in the last quarter. Benefited from foreign exchange gain and deferred tax assets, the net loss was $80.1 million, compared to $110.7 million in the last quarter. Turning to our balance sheet and cash flow, during quarter three, we spent $36 million to sustain the wafer supply and the machine production. Other cash payments included $15 million for operations. The cash flow totaling $51 million was partially offset by cash inflow of $26 million from sales.

[James Jin Cheng, CFO at Canaan Inc.]

So net, net, at the end of the third quarter, we had cash and cash equivalents of $41 million on our balance sheet. We are glad to announce today that our balance is further bolstered with a capital injection up to $125 million in the form of convertible preferred share sales, with multiple tranches subject to the customary closing conditions. We intend to use the net proceeds from this capital raise to fund the R&D expansion of production scale and other general corporate purposes. As of the end of this quarter, we recorded accounts receivable of $9.8 million, declining $0.3 million compared to the end of quarter two. We did not implement more installments in quarter three, and we will continuously evaluate market demand and adopt corresponding credit policies with caution.

[James Jin Cheng, CFO at Canaan Inc.]

Now, turning our attention to our Bitcoin assets. We held a record high, 860 Bitcoins as our own holding asset of September 30, which is 113 more than 747 at the end of June. We also held 378 Bitcoins received as customer deposit, which is the same as the balance of June 30. From August 29, 2023, the date we reported our quarter two financial results to November 28, 2023, we neither utilized the ATM nor purchased any ADS. On November 10, we terminated the ATM agreement with the former sales agent, and we announced on November 13, we have adjusted our ATM project by appointing B. Riley as the new sales agent.

[James Jin Cheng, CFO at Canaan Inc.]

In the future, we will prioritize shareholders, carefully monitor cash flows and stock prices, and flexibly execute any potential ATM sales or stock repurchases. In quarter four, we anticipate a revenue of $34 million. In the end of 2023, the price of Bitcoin is still facing a challenging environment, and the price competition remains intense. Policy changes regarding cryptocurrencies and mining in different countries will also add uncertainty to industry operations. We may face unforeseen obstacles. Based on the above comprehensive situation, we give a cautious expectation for the fourth quarter of 2023. Now, I would like to briefly walk you through our financial results for the quarter.

[James Jin Cheng, CFO at Canaan Inc.]

Revenues in the third quarter of 2023 were $33.3 million, as compared to $73.9 million in the second quarter of 2023, and $145.5 million in the same period of 2022. Gross loss in the third quarter of 2023 was $69.1 million, compared to a gross loss of $70.1 million in the second quarter of 2023, and a gross profit of $32.6 million in the same period of 2022. Total operating expenses in the third quarter of 2023 were $43.8 million, compared to $49.0 million in the second quarter of 2023, and $43.1 million in the same period of 2022.

[James Jin Cheng, CFO at Canaan Inc.]

Loss from operations in the third quarter of 2023 was $112.8 million, compared to a loss from operations of $119.1 million in the second quarter of 2023, and a loss from operation of ten point five million US dollars in the same period of 2022. Net loss in the third quarter of 2023 was $80.1 million, compared to a net loss of $110.7 million in the second quarter of 2023, and a net income of $6.3 million in the same period of 2022. Basic and diluted net loss per ADS in the third quarter of 2023 were $0.47.

[James Jin Cheng, CFO at Canaan Inc.]

As of September 30, 2023, the company had cash and cash equivalents of $40.6 million. This concludes our prepared remarks. We are now open for questions.

[Operator]

Thank you. We will now begin the question and answer session. As a courtesy to other investors and analysts who may wish to ask a question, please limit your questions 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. To ask a question, please press star one, one and wait for your name to be announced. For the benefit of all participants on today's call, if you wish to ask your questions to management in Chinese, please immediately repeat your questions in English. One moment for the first question.

[Operator]

First question comes from the line of Mr. Lucas Pipes from B. Riley Securities. Please go ahead. Mr. Pipes, your line is now open. You may unmute locally.

[Lucas Pipes, Managing Director, Equity Research at B. Riley Securities]

Thank you very much, operator. Good morning, everyone. Good evening. My first question is on the marketing side, and I wondered in the current environment, could you speak to what you compete on? Is it price? Is it financing? Is it the quality of your product? If you could maybe just share a little bit of color on that, I would appreciate it. Thank you.

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

Yeah. Good evening or good morning. I think for this industry, the most important factors are product performance and price. Regardless of the ways of competition, these two aspects should always be a top priority. In addition, it's crucial to establish our unique features. Looking at the current and the future market is essential to make targeted adjustments and customized product designs at the system level based on the specific needs of our customers. For example, we have dedicated a lot of effort recently to ensure our systems can operate reliably in harsh environments. This has received a lot of positive feedback from our customers.

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

I believe we are industry leaders regarding product quality and customization. Right now, I think the key focus is on rapidly improving product performance while reducing the cost. Thank you.

[Lucas Pipes, Managing Director, Equity Research at B. Riley Securities]

Very, very helpful. Thank you for that. And then, I wanted to touch on the chip procurement strategy at this time. Kind of with where the market is today, how are you looking at, you know, making commitments to your suppliers? Thank you very much.

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

Yeah. I think given that we are currently in the process of product iteration and considering the volatile market conditions, we have adopt a sales-driven production strategy. This means that we determine the quantity of wafers to be ordered based on the number of contracts on sale side, certainly with a certain percentage added. Yeah.

[Lucas Pipes, Managing Director, Equity Research at B. Riley Securities]

That's very helpful. Good to hear as well. Thank you. And then, one last one for me. I'm just curious how maybe the U.S. market is holding up more specifically and also, you know, what some of the key differences you might be seeing between the U.S. and other markets globally? Thank you.

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

Yeah, okay. In the United States, miner customers are primarily institutional clients, and their funding often comes from the capital markets. Currently, financing costs in the U.S. remains relatively high. However, we have observed that financing channels that were almost closed in the past year are gradually reopening. As a result, there are signs of recovery in mining machines demand in the U.S. market, along with the reopening of financing channels. The U.S. market has a relatively high demand of mining machines, and the competition is fierce as well. It's necessary to provide both top performance and competitive pricing.

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

Given that, U.S. market has constantly be a sizable one, it's become a highly competitive battleground. Yeah. Thank you.

[Operator]

Thank you very much for all the color, and to you and to the team, best of luck. Questions. One moment for the next questions. Our next question comes from the line of Michael Donovan from HC Wainwright. Please go ahead.

[Mike Colonnese, Managing Director, Senior Crypto and Blockchain Analyst at H.C. Wainwright]

Thank you, operator. This is Mike Colonnese coming in on behalf of Kevin Dede. NG and James, congrats on the quarter. Can you discuss a bit more about the inventory levels of older generation machines? Are they completely gone now?

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

... Yeah, hello. Currently, the destocking process of models up to A12 is now nearly complete. Yeah. So, our focus has recently shifted to clearing stock of the A13 series. Yes.

[Mike Colonnese, Managing Director, Senior Crypto and Blockchain Analyst at H.C. Wainwright]

Okay, thank you. That's helpful. Now, for the order levels for the new A14 series, what are the trends you're seeing in the fourth quarter?

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

Yes. Our newly launched A14 series mining machines, yeah, have a higher computing power and power and a much better power efficiency, making them more competitive. Since we start pre-sales in mid-September, we have received future contracts for about 2 million TH/s. These orders are currently making their ways into the supply chain for production. Yes.

[Mike Colonnese, Managing Director, Senior Crypto and Blockchain Analyst at H.C. Wainwright]

Okay, great. Now, if we could switch to self mining. You have about 4 exahash currently deployed. How much are you generating now, in terms of the mid fourth quarter, and, and how much more do you have to deploy?

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

Yeah. Mining remains a long-term strategic part of our business, so we continue to explore mining cooperation opportunities with other regions. In the third quarter, the pilot batch of computing power for new projects in North and South America entered operation. The latest batch of 2,000 of our A1346 mining machines was successfully deployed and launched for our joint mining project with Stronghold. Yeah, so at the end of the third quarter, we have about 4 exahash per second of computing power deployed. Also, recently, we have expanded our mining computing power in South America and Africa. In addition, we signed contracts for a new project in the Middle East during the fourth quarter.

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

This include our first pilot collaboration with our in-house integrated liquid cooling mining solution, which is currently in the progress of deployment and installation testing. Also about, yeah. Also, we already obtained the Type 2 license for our mining operations in Kazakhstan in mid-November, as required by the country's new mining policy. Obtaining this license means we are legally permitted to conduct Bitcoin mining duties in Kazakhstan. So, at present, we are in the process of registering the mining machines deployed locally under this license. We are in discussions with our mining partners to prepare for the reception of operations.

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

If all goes smoothly, we can expect our mining project in Kazakhstan will gradually resume operations around the end of the year. Thank you.

[Mike Colonnese, Managing Director, Senior Crypto and Blockchain Analyst at H.C. Wainwright]

Thank you, NG. I'll hop back into queue.

[Operator]

Thank you for the questions. One moment for the next questions. Our next question comes from the line of Michael Legg from The Benchmark Company. Please ask your question.

[Michael Legg, Senior Analyst at The Benchmark Company]

Thanks. Wanted to touch base on the preferred offering you're doing of $125 million. Can you talk about some of the terms of that, whether it's convertible, whether there's a dividend, board seat, et cetera? Just give us a little bit more information on that, please. Thanks.

[James Jin Cheng, CFO at Canaan Inc.]

Thank you, Michael. James speaking. I think today we announced a sales of convertible preferred shares of up to $125 million with multiple tranches subject to the customary closing conditions. I think the specific preferred share details are available in the documentation released today on our Form 6-K. I think we intend to use the net proceeds from this capital raise to fund our R&D and expansion of production scale and other general corporate purposes. I think that's the basic idea of doing this fundraising.

[Clark S. Soucy, Director of Investor Relations at Canaan Inc.]

... Thank you, Michael.

[Michael Legg, Senior Analyst at The Benchmark Company]

Okay, that's it. Okay, I'll check the 6-K for the details. And then just I want to follow up on Michael's question on the inventory. What percent is finished goods A14s of the inventory, and what part, how much of it is still raw materials versus all the models?

[James Jin Cheng, CFO at Canaan Inc.]

Michael, currently, A14 series is still a purely new product. So we are placing the orders of wafers, and then we can get the finished goods in late quarter one. I think that's the schedule. So currently, we don't have any finished goods, I mean, the current stock. We will wait for the wafers coming out and produce the chips and then assemble the machines and deliver to our customers later.

[Michael Legg, Senior Analyst at The Benchmark Company]

Okay. So of the $217 million of inventory, how much is raw materials versus all the finished goods?

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

Okay. Oh, I think... Yeah, most, I think, about maybe one third of the numbers is the finished goods for the A13 series. And another two-thirds is, I think it's diversified to many different stages, like the chips or already assembled the PCB, but not still waiting for assembling to the machines. And maybe there's also some percentage still at the wafer level. Yeah, but I think there's no wafers still in process. Yeah.

[Michael Legg, Senior Analyst at The Benchmark Company]

Okay, and then just one last question. Can you comment on where you think your market share is today, how you're seeing your sales versus your competition? Thanks.

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

Yeah, I think, yeah, it's a very volatile market this quarter. But for the third quarter is a quietly boring quarter. So I don't think the market share number is have some significant change in sort of quarter three. Usually, we think it's about 20% or close to that number is our market share. For the first quarter, we can observe the significant sales spike in... Yeah, but still there's about one month to go, so. And also we can observe that there's a significant hash rate increase in quarter four.

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

We are still waiting for that number, yes.

[Michael Legg, Senior Analyst at The Benchmark Company]

Okay, thank you.

[James Jin Cheng, CFO at Canaan Inc.]

Yeah, and-

[Michael Legg, Senior Analyst at The Benchmark Company]

...

[James Jin Cheng, CFO at Canaan Inc.]

Michael, you know, our two major competitors, they are private companies, so they don't disclose their result. So we have no accurate number of the whole market share. But NG has described the, you know, the sense about the market share.

[Michael Legg, Senior Analyst at The Benchmark Company]

Okay, great. Thank you.

[Operator]

Questions. Our next question now comes from the line of Shuang Sun from Guosheng Securities. Please go ahead.

[Shuang Sun, Blockchain Industry Analyst, Research Institute at Guosheng Securities]

Hello, can you hear me?

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

Yes, please.

[Shuang Sun, Blockchain Industry Analyst, Research Institute at Guosheng Securities]

Oh, okay. My first question is, how has the computing power price recovered from the bottom, when and to what extent?

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

Yeah, thank you. Thank you for question. Well, from what we've seen so far, the demand was quite low throughout the entire third quarter. However, as we move to the first quarter, we noticed that an increase in demand, especially in the past few weeks. But there has not been a significant increase in the average selling price. It's important to note that Bitcoin price has only experienced a noticeable upturn in the past few weeks, and the market typically does not react so quickly.

[Shuang Sun, Blockchain Industry Analyst, Research Institute at Guosheng Securities]

Okay.

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

Yeah. Thank you.

[Shuang Sun, Blockchain Industry Analyst, Research Institute at Guosheng Securities]

Okay. Thank you. My second, second question is that, with increasing demand from AI computing power nowadays, can you secure enough wafer supply with the foundry? What's the cheap process node of your mainstream products, and which foundry do you collaborate with now?

[Nangeng Zhang, Chairman and CEO at Canaan Inc.]

Yeah, the chips used in our mining machines adopt a different process node, and we are fabricated on a different production line from mainstream cloud-based AI computing chips. And, I think the current bottleneck in AI chip production primarily. It's in advanced packaging. So from my observation, it has not yet impacted the production capacity of the advanced process node. So, and the fabrication process of our current mainstream products aligns with that of our peers. The capacity for this advanced process is only available from a selected few top-tier semiconductor foundries. And also, we have established long-term partnerships with these foundries.

[Shuang Sun, Blockchain Industry Analyst, Research Institute at Guosheng Securities]

Okay. Thank you.

[Operator]

Thank you for the questions. In the interest of time, I would like to turn the call back over to the company for any closing remarks.

[Clark S. Soucy, Director of Investor Relations at Canaan Inc.]

Hello, everyone, and thank you again for joining our Q3 earnings conference call today. If you have any further questions, please feel free to reach us through the contact information provided on our website. Thank you again.

[Operator]

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

Participants

Executives

• Clark S. Soucy, Director of Investor Relations
• James Jin Cheng, CFO
• Nangeng Zhang, Chairman and CEO

Analysts

• Lucas Pipes, Managing Director, Equity Research at B. Riley Securities
• Michael Legg, Senior Analyst at The Benchmark Company
• Mike Colonnese, Managing Director, Senior Crypto and Blockchain Analyst at H.C. Wainwright
• Shuang Sun, Blockchain Industry Analyst, Research Institute at Guosheng Securities