Canaan Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 27, 2024

There are 7 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Kainan Inc. 4th Quarter and Full Year 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.

Operator

The company's financial and operating results were released by the Newswire services earlier today and are currently available online. The company has also prepared a presentation for today's call. You may view the presentation and navigate through the slides on the webcast page for the Q4 2023 earnings call on the company's IR website. Joining us today are Canaan Inc. Chairman and CEO, Mr.

Operator

Nangeng Zhang and CFO, Mr. Jingcheng James. In addition, Mr. Leo Wang, IR Senior Director Ms. Shi Zhang, IR Manager, will also be available during the question and answer session.

Operator

Mr. Zhang will start the call by providing an overview of the company and performance highlights for the quarter. Mr. Chen will then provide details on the company's operating and financial results for the period before we open the call up for your questions. Before we continue, I would like to refer you to our Safe Harbor statement in our earnings press release.

Operator

Today's call will include forward looking statements. These statements include, but are not limited to, our outlook for the company and statements that estimate or project future results of operations or the performance of the company. These statements speak only as of the date hereof, 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, uncertainties and assumptions that may cause actual results to differ materially from those set forth in such statements.

Operator

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 now turn the call over to our Chairman and CEO, Mr. Nangen Zhang.

Operator

Please go ahead, sir.

Speaker 1

Hello, everyone. This is Enji, the CEO of Canon. Thank you for joining our conference call. Our CFO, James and I are at the company's headquarters in Singapore to share our quarterly results with you. In the Q4 of 2023, especially in December, the price of Bitcoin in general kept showing an upward trend, starting at around $27,000 at the beginning of the quarter and reaching an annual high of about $44,000 by the last week of the quarter.

Speaker 1

At the same time, the total network hash rate continued to rise, exceeding 500x hash per second. The rapid continuous rise in Bitcoin price and the increase in transaction fee rewards led to a rapid increase in mining revenue, promoting miners' willingness to purchase computing power. Furthermore, discussions about end of the interest rate hike cycle and upcoming approval of a Bitcoin spot ETF have made industry participates, including miners more optimistic about future. As a result, both production sales exceeded expectations in this quarter, especially in December. As a housing event approaches, mining equipment providers are also stepping up destocking efforts with the theme of small profits for faster overall remaining prevalent this quarter, keeping product ASPs low as effective.

Speaker 1

In such a rapidly changing market environment, we see the favorable market window of this quarter, especially in December, achieving a total revenue of US49 $1,000,000 including machine mining machine sales revenue of US44 $1,000,000 much higher than the management's expectation of US34 $1,000,000 revenue in the 3rd quarter's conference call. In the last quarter of 2023, we also adjusted the company's strategy and organizational structure according to changes in the market situation, improving R and D and operational efficiency, increasing investment in production capacity, diversifying mining operations and exploring international markets such as North America, Southeast Asia and the Middle East. Completing financing in the capital market with sufficient funds enable us to deploy in advance and meet the explosive demand in the upcoming bull market. Now let me go into more detail. After announcing the A14 Series Miners in September 25, 2023, we continue to work diligently over the following quarter to improve performance and reliability at the whole machine level and transition the new generation products into mass production.

Speaker 1

The A14 series manor are expected to begin small scale deliveries in Q1 2024 with large scale deliveries expected to concentrate in Q2 to Q3. Meanwhile, the development of our next generation products is also progressing rapidly as customary. We will publicly disclose the specific performance of new products after prototype testing is completed. In addition to mining machines, the company's self developed integrated air or liquid cooling mining solutions have been gradually delivered and generating revenue throughout the 3rd and the 4th quarters. These integrated solutions are highly integrated, allowing for rapid deployment and enabling our mining machines to operate in controlled environments, thereby maximizing performance and reducing maintenance costs.

Speaker 1

These benefits increase customer willingness to purchase our mining machines, putting us in a favorable position in the series of sales. To better test our products, we choose to showcase them first in the hot Middle Eastern region, demonstrating our confidence in product performance. In terms of mining machine sales, we achieved approximately 5.47 1,000,000 terahash per second of computing power flow in the 4th quarter, a year over year increase of 192% and a quarter over quarter increase of 49%. Mining machine revenue reached US44.1 million dollars representing a sequential increase of about 49%. Additionally, the contract sales for our April 14th series mining machines received issued uptick booking from customers this quarter, with accumulated contract sales orders exceeding 7,500,000 terahertz per second with customer prepayments.

Speaker 1

This encouraging growth in contract sales orders has elevated the company's level of customer advance as of the end of 2023. However, the gross margin of these presales orders is not high. The sudden influx of contract orders will also test the company's delivery capability. We will better balance cash flow and inventory as well as manage its inventory allocation between contract sales, spot orders and mining business. At the end of the Q4, we once again entered into a procurement agreement with publicly listed companies such as Cipher Mining Inc.

Speaker 1

And Stronghold Digital Mining Inc. This includes a contract sales order from Cipher for 16,700 units of A1466 mining machine and another order from Stronghold for 1100 units of the A1346 mining machine. Additionally, earlier deliveries include 11,000 units of 1346 model to Cipher and 2,000 units to Stronghold, all of which have been delivered to their respective mining sites and installed by the Q4 operating smoothly. In the Southeast Asia region, where we focus on channel sales, we achieved sales of 900,000 terahash per second of computing power in the 4th quarter, contributing to stable sales orders. Our online retail store targeting overseas markets expanded their reach to 4 new regions, include Norway, the Dominican Republic, Paraguay and Israel, totaling 46 regions reached by this quarter, meeting the purchasing needs of decentralized individual miners worldwide.

Speaker 1

Benefiting from factors that are increasing the Bitcoin price, transaction fee rewards and the improved uptime, we achieved mining revenue of approximately RMB3.7 million in the 4th quarter, representing a growth of about 14% compared to about US3.3 million dollars in the 3rd quarter. In the Q4, we mined a total of 101 bitcoins. The company continues to maintain a holding strategy in its bitcoin mining business. At the end of the Q4, we held 909 bitcoins belonging to the company, reaching a historical high. The current market value of our bitcoin assets is almost US50 $1,000,000 At the end of the Q4 of 2023, our total energy the money computing power was 1.91 exahash per second.

Speaker 1

In Kazakhstan, following the acquisition of the necessary Type 2 license for mining, we have been collaborating with our local partners to resume mining operations despite challenges such as hash code, weather and the need to reestablish cross border accounts, we have made significant progress We promised re energizing our mining machines in the Q1 of 2024 and the majority of them have now been successfully reentered. As a result, these gradually reactivated mining machines have begun generating mining revenues. In 2024, while maintaining our mining strategy, we will continue to adjust and upgrade our specific operating tactics. 1st, when selecting project opportunities, we will pay more attention to factors such as legal system and the regulatory stability in the projects located region, enhancing risk control. We will expand our scale while ensuring the security of our company assets.

Speaker 1

Secondly, we will shift from cash flow oriented to growth oriented strategies. Therefore, unlike in the past, we will use more advanced mining machine models for self mining, prolonging investment spend, reducing operational risks and enhancing the market competitiveness of our mining business. Lastly, in addition to proactive mining models, we will also consider fixed rate hosting and other ways such as self construction or acquisition, to deeply participate in mining operations. As of today, the company has 11 active mining projects globally, with a total of 2.8 exahash per second of energized computing power. This energized computing power has increased by 46% compared to the end of Q4 of 2023, mainly due to the re energization of some machines in Kazakhstan and the energization of machines in other projects.

Speaker 1

As of today, we have 2.1x hash per second of expected computing power to be installed. This refers to the computing power that Kainen has shipped to a targeted mining country, but has not yet been put on the shelf. And we expected we expect to gradually install and power it up in the 1st and second quarters of this year. We defined the estimated total computing power deployed as a sum of computing power installed and expected computing power to be put on the shelf. Based on the estimated total power deployed, the estimated total power demand of all mining farms is 177 megawatts with a weighted average electricity cost of around $0.05 per kilowatts and per kilowatts hour and weighted average revenue share ratio of around 70.9%.

Speaker 1

In the Q4, the market environment, driven by the price of Bitcoin, notably improved. Although the performance of the mining machine market lagged behind the Bitcoin price change, showing continued decrease in the mining machine price. On one hand, the company continued its prudent cost and expense control. On the other hand, following the organizational investments, we have a linear and more efficient team, which is well prepared for the BU market. Our sales efforts resulted in a significant increase in sale cash inflows despite some non cash provisions and impairments associated with promotional interactives.

Speaker 1

These interactives enable us to generate crucial cash inflows. And our destocking efforts are nearing completion. In general, our strong sales collection and fundraising contributed to our robust increase in the ending cash balance in Q4 2023. In the Q1 of 2023, through the insurance of preferred shares and ATM offering, the company has secured a net financing amount of about US86.2 million dollars In the Q1 of 2024, the company received another US50 $1,000,000 of financing through the settlement of preferred shares. In the early stages of last year's Q4, we made a judgment that the bear market was bottoming out and the bull market was approaching.

Speaker 1

However, based on experience, market changes due to during the Bear to Bull transaction were very rapid, requiring early preparation of the supply chain and the product layout. In the past, we relied on internal funds and proceeds from customer advancement. Cash from these resources was lower to materialize and constrained our ability to expand during bullish periods, resulting in suboptimal capital utilization. This inflection of funds from preferred shares and ATM offerings has allowed us to advance our supply chain and the related production capacity preparations by at least 2 months. This enabled increased investments in research and development and accelerating product development progress.

Speaker 1

From a longer perspective, the benefits deliver may even exceed the 2 month timeframe, positioning us to capitalize on significant market opportunities in the blue market and expand our market share. Since the SEC officially approved the listing and the trading of Bitcoin spot ETFs, The price of Bitcoin has expanded a brief consolidation phase and recently broke through and stabilized about US50 $1,000 with a combined effect of improved sales and the success of financing settlements. Our cash and cash equivalents increased from US41 $1,000,000 at the end of the 3rd quarter to US96 $1,000,000 at the end of the 4th quarter. However, we must also recognize that the Fed's interest rate cut cycle has not yet truly begun. Financing costs remain high for miners and there is still uncertainty about the pace of Bitcoin's upward movement, posting ongoing challenges to the industry.

Speaker 1

The Q1 of 2024 is also the last complete quarter before the HAGEN event. And based on our past experience, this quarter is a super wait and see period that occurs every 4 years, Coupled with the multiple factors of the halving, the New Year, the Chinese Lunar New Year, the market in this quarter is expected to be very subdued and the recovery is likely to occur in the Q2. Based on the comprehensive situation outline above, we are providing cautious outlook for the first half of twenty twenty four. We anticipate revenue of approximately US33 $1,000,000 in the Q1 of 2024 and approximately $70,000,000 in the 2nd quarter. This forecast is based on the company's current market and operating conditions and actually and actual results may vary.

Speaker 1

2023 was a challenging year for the entire industry. This wavering phase. We overcome the rise of obstacles and successfully navigated through the market downturn as planned. Even during times of this year, we enhanced corporate governance and made extensive preparations for the halving and the bull market. What doesn't kill me will only makes me stronger.

Speaker 1

We have never been more confident in seeing the historic opportunities presented by the midpoint bull market. For the industry, 2024 will be a pivotal turning point. In the previous cycle, institutional investors represented by Wall Street launched a significant bull market with 69,000 price per Bitcoin. I have always said that the next bull market can only and must be driven by widespread public participation. As the New Year begins, the approval of the Bitcoin spot ETF is a milestone and can serve as a starting point for the next bull market.

Speaker 1

We will continue to work diligently, supporting the Bitcoin system with computing power and over the next 4 years, straight to expand the applications of computing power, promote industry development and enhance social operational efficiency alongside industry leading partners, ultimately supporting the progress of society. This concludes my prepared remarks. Thank you, everyone. I will now turn the call over to our CFO, James. Thank you.

Speaker 2

Thank you, Angie, and good day, everyone. This is James speaking at our Singapore headquarters. As Angie studied at the top of the call, bitcoin price grew significantly in quarter 4, especially stayed high in December. And the market demand on machines quickly recovered before total hash rate exceeding 500x hash per second. We see that the short time window of Bitcoin price increase maximized our machine sales through multiple channels, drove customer advanced payment on our new A14 series, promoted diversified deployment in mining, improved operational efficiency by organization optimization and received a series of fundraising from ATM and preferred shares.

Speaker 2

Our strong sales collection and fundraising contributed to a positive ending cash balance, which reached US96 million dollars at the end of quarter 4, increased from $41,000,000 at the end of quarter 3. Frankly speaking, those were a series of better results beyond our previous expectations in November. Let's start with profit and loss. Quarter 4 total revenue was US49.1 million dollars which beat our guidance of US34 million dollars by 44% favorable variance and represented an increase of 47% quarter over quarter. Our revenue from machine sales was $44,000,000 and our mining revenue was $3,700,000 Regarding our machine sales, we delivered a total computing power sold of 5,500,000 terahash per second, representing a year over year growth of 192% and a quarter over quarter growth of 46%.

Speaker 2

And the average selling price increased from $7.9 per terahash per second in quarter 3 to $8.2 per terahash per second in quarter 4. The increases were mainly driven by our destocking efforts for A13 series and the improved customer demand. Meanwhile, distributors and the online retail store also contributed to the revenue of machine sales. Southeast Asia contributed 900 terahash per second delivery in quarter 4, mainly from distributors. And our online store first time cover the Kingdom of Norway, Dominican Republic, Paraguay and Israel.

Speaker 2

Total country and areas with shipments reached 46 for the first time. Demand from more and more small scale miners was satisfied. Considering both factors of power sold and ASP, our revenue from mining machine sales achieved $44,000,000 up 49% from US29.5 million dollars in the last quarter. In addition to mining machines, our self developed integrated air or liquid cooling mining solutions have been gradually delivered throughout the 3rd and the 4th quarters. Accumulated orders from customers was higher than US4 $1,000,000 driven by customer recognition of our integrated cooling technology.

Speaker 2

The revenue from integrated mining solutions in quarter 4 was US0.6 million dollars up 133 percent from US0.2 million dollars in quarter 3, driven by the increased delivered volume. Specifically, for our mining machine sales, we accrued US55.5 million dollars for inventory write down, prepayment write down and provision for reserve for inventory purchase commitments in this quarter. The inventory write down decreased sequentially by 16% to US45.1 million dollars which was driven by the accelerated destocking in this quarter. Those write downs and provisions are made under U. S.

Speaker 2

GAAP rules, jeopardizing our gross profit 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 US0.7 million dollars and a gross margin of 1.6%. Turning to our mining business. Our mining revenue increased 14% quarter over quarter. We expanded our mining business in Africa, South America and the Middle East, which resulted in our total energized Hash rate accumulated to 1.9xash per second in the end of quarter 4.

Speaker 2

We mined 101 bitcoins in this quarter and achieved 35 bit points for mining profit. Gross profit margin reached a record high 41% for our mining business in this quarter, which was mainly attributed to the average Bitcoin price increase from about 28 $1,000 in the last quarter to over $36,000 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 for the deployed machines. Additionally, we and our local partners in Kazakhstan went through a bunch of challenges from harsh cold weather to resetting up cross border bank accounts. 1 point 0 9 exahash per second out of 2.0 exahash per second in Kazakhstan have been successfully reenergized to normal in early January.

Speaker 2

That makes our total energized computing power to 2.8 exahash in quarter 1 2024, which has been deployed in 6 countries and areas. This enables us to expect a material mining revenue increase in quarter 1 2024 compared to quarter 4. And we continue to expand our mining business with another 2.1 exahash per second machines to be energized in quarter 1 and quarter 2, as CEO mentioned previously. Shifting to our AI business. AI revenue was US0.3 million dollars in this quarter, up 59% quarter over quarter.

Speaker 2

This growth was primarily driven by the increased sales volume of our AI products. Now turning to the expenses. Our operating expenses totaled US39.2 million dollars decreasing 36% year over year and 10% quarter over quarter, respectively. Excluding the one off expenditure for our new generation chips incurred in Q4 of 2022, our operating expenses decreased 15% year over year, which was mainly due to the decrease in staff costs, share based compensation and Bitcoin impairment. The sequential decrease was mainly due to the decreased Bitcoin impairment and the realized gain on Bitcoin and secondhand mining machines sold.

Speaker 2

Please note according to the accounting rules, when we sell the secondhand machines replaced from our mining business, the realized income will benefit our P and L by offsetting G and A expenses rather than contributing to the revenue. Besides, in this quarter, we incurred a one off expenditure of US2.2 million dollars for the organization optimization, which was offset by the decreased annual performance based bonus. We believe the positive effects of operational efficiency improvements will begin to be reflected in our operating data from quarter 1 2024. The net result of the foregoing was a non GAAP operating loss of US78.3 million dollars for this quarter, narrowed 29% year over year and 20% quarter over quarter respectively. Benefited from the non cash recognition for deferred tax assets, non GAAP net loss was US53.9 million dollars narrowed 30% year over year and 17% quarter over quarter, respectively.

Speaker 2

Please note that according to U. S. GAAP accounting rules, we recognized the 1st closing of preferred shares financing as convertible liability, the 2nd closing of preferred shares as forward liability and the pre delivery ADSs as own share lending equity respectively. These financial instruments incurred an excess of fair value over proceeds received and a fair value change. This non cash accounting treatment hit our Q4 bottom line with total US70 $1,000,000 In order to represent our performance more accurately and more comparably, we excluded these impacts from our non GAAP measures.

Speaker 2

In addition, although legally issued, the pre delivery ADSs were not considered outstanding, than excluded from basic and diluted earnings per share. Turning to our balance sheet and cash flow. In quarter 4, we received US61.2 million dollars from the ATM and US24.8 million dollars from preferred shares financing facilities, respectively. And we paid $35,000,000 to secure our wafer supply by utilizing the fund raising proceeds. The other proceeds were also utilized for the wafer supply prepayment in January 2024.

Speaker 2

During this quarter, the cash outflow of US71 $1,000,000 for productions was offset by cash inflow of $75,000,000 from sales, which was mainly contributed by spot sales of A13 series and advanced payments for A14 series. So our cash flow from production and operation turned positive with US4 $1,000,000 Consequently, at the end of 2023, we held cash and cash equivalents of US96 $1,000,000 on our balance sheet, which was US55 $1,000,000 higher than the ending balance of September 30. Now moving on to our contract liability. The improved market demand helped us to record contract advances of US19.6 million dollars as of 2023 year end. This balance increased to 28.6 times compared to US0.7 million dollars at the last year end and 2.5 times compared to US5.6 million dollars at the last quarter end.

Speaker 2

The majority of contract advances came from pre sales of A14. It included but not limited to those sales contributions from big clients. As previously announced, we secured follow on purchase orders from Cipher and the Stronghold with over 17,000 minuteing machines. As of the end of quarter 4, recorded account receivable of US3 $1,000,000 declining 69% compared to the end of quarter 3 as a series of payments have been made by customers during quarter 4. We will continuously evaluate market demand and adopt corresponding credit policies with caution.

Speaker 2

Now turning our attention to our Bitcoin assets. The Bitcoins we held as our own holding assets kept growing in this quarter and reached 9009 Bitcoins as of December 31, which is 49 more than 860 at the end of quarter 3. We also held 169 bitcoins received as customer deposit, which declined 209 bitcoins compared to the balance of September 30. I want to share with you that we plan to early adopt the FASB new accounting rules on cryptocurrency assets since January 1, 2024, which allow cryptocurrencies to be carried at the fair market value. If adopted with the price at January 1, 2024, our cryptocurrency held by the end of 2023, we anticipate that the carrying value would increase approximately US18 $1,000,000 based on latest price difference between market price and the booking price.

Speaker 2

The current fair market value of those owned bitcoins is almost $50,000,000 We believe these rules will enhance the transparency and accuracy of our financial statements as well as provide better clarity to our investors and shareholders. Turning to our fundraising. From November 28, 2023, the date we reported our Q3 financial results to December 31, 2023, we utilized the ATM for fundraising with net proceeds of US61.2 million dollars In late 2023, we closed the 1st tranche of preferred shares financing, raising total net proceeds of $24,800,000 In early January 2024, we closed the 2nd tranche of preferred shares financing, raising total net proceeds of US49.7 million dollars The total proceeds of US136 million dollars fund raising helped us carry out new product R and D and wafer capacity preparation to secure future mining machine supply after halving. In the Q1 of 2024, we anticipate revenue of US33 $1,000,000 considering many of our customers are waiting for Harbin to generate more visibility about ROI of CapEx investment. While for quarter 2, 2024, we anticipate a revenue of $70,000,000 considering A14 series pre order volume and the potential demand upside after halving.

Speaker 2

Consequently, the selling price of computing power will remain under pressure. Policy changes regarding cryptocurrencies and mining in different countries will also add uncertainty to industry operations. We may force unforeseen obstacles. Based on the above comprehensive situation, we give a cautious expectation for the first half of twenty twenty four. Now I would like to briefly walk you through our financial results for the quarter.

Speaker 2

Revenues in the Q4 of 2023 were US49.1 million dollars as compared to US33.3 million dollars in the Q3 of 2023 US58.3 million dollars in the same period of 2022. Gross loss in the Q4 of 2023 was US54.1 million dollars compared to US69.1 million dollars in the Q3 of 2023 US64.1 million dollars in the same period of 2022. Total operating expenses in the Q4 of 2023 were US39.2 million dollars compared to US43.8 million dollars in the Q3 of 2023 and US60.8 million dollars in the same period of 2022. Non GAAP loss from operations in the Q4 of 2023 was US78.3 million dollars compared to US97.4 million dollars in the Q3 of 2023 and US110 $1,000,000 in the same period of 2022. Non GAAP net loss in the Q4 of 2023 was US53.9 million dollars compared to US64.7 million dollars in the Q3 of 2023 US76.6 million dollars in the same period of 2022.

Speaker 2

Non GAAP basic and diluted net loss per ADS in the Q4 of 2023 were $0.30 As of December 31, 2023, the company had cash and cash equivalents of $96,200,000 This concludes our prepared remarks. We are now open for questions.

Operator

We will now begin the question and answer 3 questions at a time. If you have any follow-up questions after the Q and 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 your question to management in Chinese, please immediately repeat your question in English. We will now take our first question.

Speaker 3

Great. Hello.

Operator

Your first question is from the line of Shuang Sun from Guosheng Securities. Please go ahead.

Speaker 3

Can you hear me?

Speaker 1

Yes, please.

Speaker 3

Okay. How was your recent customer order? Did you see increased sales in mining machines as miners more aggressive with stocks, mining machines preparing for the halving?

Speaker 1

In Q4 2023, we exceeded our expectations in both our sales and presales orders. Total computing power stores reached 5,500,000 terahash per second in this quarter, a year over year increase of 192% and screen show increased 46 percent from the previous quarter. And after the approval of the spot Bitcoin ETFs in January this year, the Bitcoin price went through consolidation phase and market experienced a slightly slowdown in orders compared to Q4. This is a normal phenomenon because based on our past experience and observations. Nearly, 6 months before the having, miners will who have existing facilities may deploy mining machines quickly to maximize profits.

Speaker 1

However, about a quarter before the having, miners tend to adopt a wait and see stance. Most of the miners prefer to make plans for the procurement and the deployment of money machines for the upcoming full year cycle when they see more certainty. Generally, around 1 month before having Verizon market indicators are mostly stabilized and market will begin to recover. We are also actively preparing for this, including securing production capacity for the new product, mass production and constantly engaging in the R and D and takeoffs of our next mission for that. Thank you.

Speaker 3

Has computing power selling price increased? How was the spot sales compared to contract sales? How was the sales of many machines with higher power efficiency in terms of sales volume and ASP?

Speaker 1

Entering the Q1 of 2024, the approval of the swap Bitcoin ETF for listing led to a market correction following the initial search. Despite this, there has been an intensification in mining machines manufacturers' efforts to destock result and accompanying rise in the spot price of computing power. As of now, all A13 series machines are being sold on the spot market. But in contrast, the A14 series mining machines are offered on a future basis, where the presale price has seen a gradual increase over the past 4 months. And it is anticipated that the majority of A14 series delivers will be concentrated in second and third quarters.

Speaker 1

In Q4 2023, sports sales reached computing power of 5 0.47000000 terahash per second. And with the presale orders surpassing 7,500,000 terahash per second. So the AA14 series with this enhanced computer power and energy efficiency has gathered market approval. However, due to its future sales nature, many miners with ready to use facilities still have shown a preference of spot purchase. In this respect, Varane needs among the markets.

Speaker 1

Yes, thank you.

Speaker 3

Okay. Thank you.

Operator

Thank you. We will now take our next question. The next question is from the line of Lucas Pipes from B. Riley. Please go ahead.

Speaker 4

Thank you very much, operator. Good day, everyone. So my question is a little bit higher level. Given the environment we're in with resurgent interest in Bitcoin at the network and obviously the ETF approval. How aggressive do you want to be?

Speaker 4

Do you want to take on a lot of extra capacity, procure chips to really press forward in this environment, if you want to be kind of guarded and think about potential downside risks post having. Just curious how you kind of navigate between greed and fear in this environment? Thank you very much for your perspective.

Speaker 1

Yes. It's very interesting and high level question. I think there's many uncertainties before the halving. And for us, we believe that our Mongols is to have there's only 3 significant players in this field. And we need to make targeted adjustments and customize for our product designs and with the best power efficiency and competitive pricing.

Speaker 1

Also, as AI is booming, so we need to secure the wafer requirement for the especially for the second half of this year. We already signed some agreements with our suppliers. And for us, I think, to myself, I think for the we are changing our strategy for self money. Before we our target is for the cash flow. But from this year, we will change we change our strategy to the growth.

Speaker 1

So that means we will start to invest on the facilities and use our best products to do the to do self money. Especially, we will put our majority targets at well regulated and developed country. Yes. So and yes, for the I think for the next few months, we have sufficient funds for us to do production and R and D. But for the full market, if we make the judgment that the timing comes, we will use the capital to do the expansion more aggressively than before.

Speaker 1

Yes. So I think for us, the best products and more important self money strategy will and plus the capital will make us make a better score by this bull market cycle. I think James can make some add ons on further this.

Speaker 2

Yes. I think it's always difficult or challenging to balance between aggressive and conservative. We do fundraising to support our R and D and support our capacity of wafer for future bull market. I think always we made decision together and ENGIE has a lot of experience going through the past cycles. So we always predict the bull market and bear market for future.

Speaker 2

And then we decided together about how big the investment we are going to spend in the new machine design. And a lot of past experience helped, but we always face 2 new challenges, just like mining, just like in different generation of machines, we have to solve a lot of challenges in the R and D phase. So I think it's not easy to describe the all the operations, but we always carry the courage to face to the uncertainties. And we do go through a kind of balance between very aggressive and very conservative, and then we try to maximize the performance of machine sales and mining revenue together. So I think strategically, ENGIE lead the company to do all this, but we do have a management team in different areas trying to contribute our best to the decision making.

Speaker 2

I think that's my $0.02 Thank you, Lucas. Thank you.

Speaker 4

Thank you very much for all the perspective.

Operator

Thank you. We will now take our next question. Your next question is from the line of Kevin Dede from H. C. Wainwright.

Operator

Please go ahead.

Speaker 5

Hello, gentlemen. Thank you very much for having me on the call. First question just around the self mining and sort of tangential to Lucas' question about strategic objectives. Understand you're at about 4.9 ex the hash installed and running total. I'm wondering if you think all of that will be running by the end of the March quarter And maybe more specifically, what you think your self mining Hash rate will grow through the balance of the year?

Speaker 1

Hi, Kevin. What I want to mention again is for we start our self mining business in the second half of twenty twenty one. And we have been deploying many projects and I think gaining both experience and licenses. So we have deployed more than 5x hash per second, that's computing power and analyze over 28x hash per second through the like Central Asia, North Africa, South America, Middle East, so on. But in 2024, while mainstream we're training our mining strategy, This year, we will adjust and upgrade our specific operating tactics.

Speaker 1

Firstly, we pay more attention for factors such as legal system and regulatory stability enhance the risk of fraud. So that means we will change our major targets major regions for our mining operations, even though it's maybe a little bit costly or will take a slightly longer deployment time. And also, we will expand our scale well. Yes, and we will shift from cash flow oriented to growth oriented. What it didn't mean is, I think in the past, we when we have inventories, we will put the inventories to do that money.

Speaker 1

This is make the inventories to generate cash flow for the company. Yes. And from now on, our target is to grow the stock mining business, not only the cash flow generation. So that means we will use our best models to do the stuff. If you are using the better machines, it will lower your it will prolong your investor spend and reducing the operational risks such as the money revenue cannot reach the power cost or something.

Speaker 1

So it will lumber your lifetime of your entire investments. Yes. And also, in the past, we maybe we use cooperates with hosting companies. We have no self hold facilities and we are not doing any like self construction or something. But today, after over 2 years, over 3 years, I think, so we learned that it is the value of the stable facilities, the power resources is really, really very important for this industry.

Speaker 1

So we will go deeper to participate with many operations and more exploring more collaborations. Yes. Thank

Speaker 2

you. Yes. Kevin, one thing to mention here is the whole deployed hash rate is 5x HASH. And the energized hash rate now is about 2.8xash. So we still have 2.1xash to be implemented in quarter 1 and quarter 2.

Speaker 2

We are waiting for the progress update from our partners. So it's not yet happening, and we believe it will happen in quarter 1 or quarter 2. So just to make sure we understand the same as us.

Speaker 5

Okay, Angie. James, thank you for the detail. Angie, you mentioned your next generation machine.

Speaker 1

I'm going to assume it's going to

Speaker 5

be the A15. I'm wondering if some of the costs you incurred include the full tape out on that chip. And if you could give us an idea on the process geometry, are we down to maybe 3 nanometers now? And when do you think that machine may be available for sale?

Speaker 1

Okay. Usually, we will public that details when we have the test machine finished the testing. But I think for the machine The machine is we just deployed the machines. So we're not selling the chips to our customers. So it's very important to know that the performance of mining machines is not determined by the process node of the chips or the manufacturer of the wafers.

Speaker 1

So from a long time to avoid the confusion among our customers, we do not emphasize the specific foundry partners. Yes, there's many other reasons, but this is the main reason. So that's focusing instead on the actual performance metrics of the product. Yes, we have plan is our plan is to about 20% performance improvement, average generation. If it's less than 20%, And also in the past, I think there's 9 to 12 months.

Speaker 1

And also, in the past, I think there's 9 to 12 months between each generation. And today, we are working very hard to shorten the period. So that means our target is to have at least 1 generation this year or and also maybe if everything is going 100% right, we will have another generation maybe Q1 next year or something. And every generation we have like 20% of the improvement. So I think another target is for the finance side.

Speaker 1

Yes, we want the new generation have some revenues this year. This is our target. That means we need to put next generation in mass production this year. Yes. This is maybe what I can say now.

Speaker 1

There's no very active numbers and we will have that numbers as soon as possible. Yes, we will probably take it.

Speaker 5

Thank you, Angie. That detail was incredibly helpful and I really appreciate it. Last question for me, probably best for James. Inventory was down about 34% Q2Q. Understand that the A13 is now completely out of inventory.

Speaker 5

I was wondering if maybe you could give us a little insight on the inventory that you are carrying, maybe how much is the air cooled versus liquid cooled and what your expectations are for that mix in the A14 series?

Speaker 2

Yes. Kevin, I think we are in the transition between A13 series to A14 series. I cannot say we have already completed the inventory clearance of A13, but luckily A13 can also generate profit for miners after having in our calculation. So it looks like the demand is still there and we can still get a lot of A13 sports sales orders even in quarter 1. So looks like A13's inventory clearance will last in quarter 1 and quarter 2.

Speaker 2

So it looks to me A13 has not been completely cleared yet. At A14, I think we will ship small batches in quarter 1, like in March. And mass production and mass shipments will happen in quarter 2. So we have already got a lot of contract sales orders, like Angie mentioned, the 7,500,000 Tera Hash. And this number is still being updated every day.

Speaker 2

It looks like customers are still placing orders to get A14. So looks like the transition is better than what I have planned in November. At that time, I was thinking A13 series will be very difficult to clear, but it looks like the progress is better than what I have expected. The cash flow tends to be positive. The operating cash flow tends to be positive in quarter 4.

Speaker 2

And that's very good looks to me.

Speaker 5

Thank you very much, Dan. Can I ask

Speaker 6

your question? Yes,

Speaker 5

yes, yes, yes, you helped. I understand that you might not want to be extremely granular regarding I think it's about $142,000,000 of inventory and what might be A13 and what's A14. But I appreciate your insights, sir. I think it was good to see the improvement in the Q4. Congratulations on the hard work to you gentlemen and your entire team.

Speaker 2

Thank you, Kevin. Thank you, Kevin.

Operator

Thank you. We will now take our next question. And this is from the line of Michael Legg from The Benchmark Company. Please go ahead.

Speaker 6

Thanks. I wanted to talk a little bit about the share count. We ended the quarter with 222,000,000 ADS out there. We closed second tranche for another $49,700,000 Can we get some guidance on the shares outstanding that you expect for the Q1 and Q2 along your revenues? It looks like with the ATM and the tranches, it's moving up pretty high.

Speaker 6

Can you just talk about that?

Speaker 2

Yes, Michael. I think at the end of last November, we announced we signed a preferred stock sales agreement with the U. S. Institutional investor for US125 $1,000,000 As of today, we have successfully completed the settlement of $75,000,000 of the financing. Due to the terms of preferred stock financing agreement, the closing of the 3rd tranche of preferred shares will be contingent upon mutual agreement between both parties.

Speaker 2

That means currently, we are not going to immediately execute the 3rd tranche. That means $75,000,000 is the total what we have completed, and we are not going to immediately do another trench. And it's a little bit complicated to say how big the common shares increased, but you can already see we have increased the common shares and that's already the common shares converted. I don't think we will increase this number in quarter 1, but let's see how it goes. The second tranche we have already delivered to the investor.

Speaker 2

Let's see how they are going to convert the preferred shares to common shares, but currently not yet updated to us. Okay.

Speaker 6

And then the $40,000,000 convert liability, long term liability, can you just explain the terms of that and how that works?

Speaker 2

Yes. From accounting rules, that's we recognize the fair value of both the first and second tranches of preferred stock based on the evaluation from an independent third party. Through our auditor, they independent third party to evaluate the preferred stocks. Then we also recognize the pre delivery shares associated with preferred stock as an ADS lending equity on a fair value basis. So the accounting treatment of these three segments of preferred share financing had a certain impact on our bottom line of quarter 4 2023.

Speaker 2

It's about $70,000,000 This total, including the first tranche and then the second tranche and also the lending preferred shares, so lending equity. So putting all this together is about $70,000,000 impact on our P and L.

Speaker 6

Okay, great. And then do you know the average price you did the $61,200,000 of your ATM? What was the average price sold?

Speaker 2

We haven't yet we haven't known the average price in the preferred shares. But we do know the ATM average price we have already put there is $1.99 if my memory is correct.

Speaker 1

I have one thing to add on is, For me and for the company side, after the US50 $1,000,000 preferred shares settled in January, for the next 3 months, at least next 3 months. I mean, we have enough funds for our operation and expansion. Yes, this is what I want to say. Yes.

Speaker 6

Okay. Thank you very much.

Speaker 2

Thank you, Michael.

Speaker 1

Thank you.

Operator

Thank you. As there are no further questions now, I'd like to turn the call back over to the company for any closing remarks.

Speaker 2

I think thank you once again for joining us today. If you have any further questions, please feel free to reach us through the contact information provided on our website.

Operator

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

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Earnings Conference Call
Canaan Q4 2023
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