Canaan Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 17, 2024

There are 4 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by and welcome to Kennen Inc. 1st Quarter of 2024 Earnings Conference Call. At this time, all participants are in listen only mode. After 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 Q1 2024 Earnings Call on the company's IR website. Joining us today are Kennen Inc. Chairman and CEO, Mr.

Operator

Nangun Zhang and CFO, Mr. Jing Ching James. In addition, Mr. Leo Wang, Head of Capital Markets Ms. C.

Operator

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 the call up for your questions.

Operator

Before we continue, I would like to refer you to our safe harbor statement in our earnings press release. Today's call will include forward looking statements. These statements include, but are not limited to, our outlook for the company and statements that estimate or project future results of operations or the performance of the company. These statements speak only as of the date 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.

Operator

Please refer to the press release and the risk factors and documents we filed with the Securities and Exchange Commission, including our most recent annual report on 20F for information on risks, uncertainties and assumptions that may cause actual results to differ materially from those set forth in such statements. In addition, during today's call and webcast, we will discuss both GAAP financial measures and certain non GAAP financial measures, which we believe are useful as supplemental measures of the company's performance. These non GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You to comparable GAAP results in our earnings press release, which with comparable GAAP results in our earnings press release, which is posted on the company's website. And with that, I will turn the call over to our Chairman and CEO, Ms.

Operator

Nan Gan Zhang. Please go ahead, sir.

Speaker 1

Hello, everyone. This is N. Jie, CEO of Kannon. 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.

Speaker 1

The Q1 of 2024 was the last quarter before Bitcoin's first half. During the Q4 of 2023 earnings call, I forecasted this to be a super wait and see period. Based on the past experience, in the last quarter, before halving in Bitcoin system, miners typically wait for the halving to actually occur and the market dynamics become stable before adjusting their investments and mining rig purchasing plans. They also try to maintain the stable operation of the existing computing power to maximize the remaining value of their equipment. Therefore, transactions during this period are generally very flat.

Speaker 1

The only variable was a rapid fluctuation in Bitcoin price during this quarter, reaching a historical high of USD 33,000. We see that this opportunity to make maximum efforts in sales activities, selling a total computing power of 3,400,000 tera hash per second and achieving a total revenue of US35 $1,000,000 surpassing Permian's expectations. At the same time, anticipating our market recovery, we'll continue to proactively prepare U. S. Expects including the mass production of new products and the R and D integration of next generation products, Striving to improve mining operations and computing power deployments, we maintain the close cooperation with our foundry partners on the supply side, laying out capacity in advance for the bull market.

Speaker 1

Our efforts have yielded positive results. Now let me share with you 1 by 1. In terms of research and development, we are delighted to announce that we officially launched our company's new generation of money machine, the A15 series, as a Bitcoin in Asia 2024 in Hong Kong on May 9. The A15 series adopts more advanced designs and process nodes, achieving significant improvements in both computing power and energy efficiency compared to the previous generation. At the event, we showcased the A1566 engineering prototype machine with actual computing power exceeding 180 5 terahash per second and energy efficiency better than 18.5 jars per terahash.

Speaker 1

The machine operated very stably, demonstrating excellent performance. We believe that the A15 series will become a more competitive product choice in the post having computing power market. Meanwhile, this quarter, our A14 products have entered mass production and delivery. Through close collaboration with foundry partners, we have completed capacity ramp ups and yield rate improvements this quarter. As we enter the Q2, the A14 series products have begun concentrated delivery and will transition to support sales in the Q3.

Speaker 1

We will continue to manage the pace of capacity locking, invest capital into mass production and meet older delivery needs. Additionally, the R and D of our next generation product, the A16 series, is proceeding as planned. This quarter, we once again introduced products to the consumer market. The Alun Nano 3 minuteor heater, this product with its portable and lightweight design and the various colors received active contract orders from consumer market since its launch. We continue to provide customers with more diverse and customized products in the comprehensive mining solutions, such as integrated mining container products, we have received positive feedbacks from customers regarding product performance, durability and the service quality.

Speaker 1

In terms of mining machine sales, this quarter, we delivered 3,400,000 terahertz per second of computing power, reflecting the wait and see attitude towards purchasing sports money machine before the Harvey. Additionally, as we transition through product integrations, We have completed the 1st batch delivery of our A14 wholesale orders in the Q1 and are now accelerating mass production deliveries. Since the pre sale launch of A14 product in late 2023, This has continued to be popular. By the end of the Q1, customer advances primarily driven by a 14 products amounted to about US39 $1,000,000 nearly double the US19.6 million dollars at the end of 2023. After the successful completion of Hao in the Q2, we have seen a significant increase in purchasing inquiries and expect to receive more customer advances.

Speaker 1

Our A15 series products made their official debut at Bitcoin Asia 2024 in Hong Kong on May 9. And within 3 days after the summit, May 12, we signed MOUs and received earnest deposits for from 26 customers, which we are currently following up on forming contract sales. Over the past few years, the company has established good sales coverage in markets with energy cost advantages. After the Halloween, customers in this market continue to show active interest in our traditional models. Based on the current situation, we are optimistic about the sales pace of certain spot inventory and expect to complete the transition of mainstream products for sales in the Q3 of this year.

Speaker 1

Additionally, in North America, where institutional matters are concentrated, we are working to enhance brand and product recognition. Besides various, corporations with public traded companies such as Cipron Stronghold, this quarter we also signed an agreement with Marasong Digital for the first time At the Bitcoin Industry Conference in Dubai and Hong Kong this year, we actively discussed cooperation opportunities with institutional and distributor customers. In Southeast Asia, distributor customers generated sales revenue of US5.7 million dollars for the 3rd quarter, up by 27% sequentially, making a stable contribution to sales orders. Our online store for overseas retail clients continues to diligently serve each customer, especially after the launch of the consumer oriented mining machine, Arun Nano 3, which has attracted active orders from individual ISAR Assist and current orders of near 10,000 units, occasionally selling out. The company's comprehensive mining solutions also received more orders this quarter.

Speaker 1

By the end of the Q1, our mining business installed computing power increase to 3.8xahash per second, a nearly 100% growth quarter over quarter. The growth is primarily due to our continued partnership adjustments and the recovery efforts in Kazakhstan after obtaining the necessary licenses as well as the progressive deployment of mining corporation projects in other regions, further diversifying our mining operations. During this quarter, the energization condition was favorable And with the combined impact of the rapid increase of bitcoin price from January to March, as well as the rise in transaction fee rewards, we achieved mining revenue exceeding US10 $1,000,000 this quarter. By the end of Q1, the number of bitcoins held by the company increased by 148, surpassing 1,000 for the first time to reach 1057,000,000,000 with a current market value of over USD65 1,000,000. We will continue to carefully balance policy stability and the locational advantages of energy costs and persist in cultivating our mining business.

Speaker 1

Since the Q1, the company has continued to improve at overall operational level by pushing forward and adopting flexible sales and sales strategies. We have made good progress in clearing out inventory, significantly reducing inventory levels on the balance sheet, while also optimizing the inventory mix, coupled with gradual collection of accounts receivable, sales cash inflows have continued to improve. As the number and the value of bitcoins held by the company increased, this portion of currency assets will provide us with substantial potential liquidity safeguard. While maintaining an overall robust balance sheet and keeping cash at a safe level, we endeavor to direct cash towards mass production. This is reflected in increased prepayments, primarily used for securing production capacity for of advanced processing technologies.

Speaker 1

On the expense side, the organizational organizations made previously showed further positive effects in the Q4. Despite the overall market conditions this quarter, the company continues to implement pricing strategies to drive sales, which has resulted in some inventory write downs. However, the overall net loss of this quarter has significantly narrowed. Since the Q1, apart from the previously disclosed US15 $1,000,000 settlement of preferred stock. The company has not engaged in any other financing activities, including ATM offerings.

Speaker 1

In line with routine practice for U. S. Listed companies, a New Shelf registration statement was submitted to the SEC just before the expiration of the last one to maintain the validity of our financing eligibility. Looking ahead to the 2nd and third quarter of 2024, our A14 minuteing machines have successfully passed through the stages of transition to mass production, capacity ramp up and yield rate improvement. Entering the phase of accelerated bulk delivery.

Speaker 1

Regarding our money operations, post halving, we are evaluating and adjusting our existing mining projects. Recently, especially after the official launch of new A1566 product, there has been a significant increase in inquiries for mining machine cells. And we have already received several earnest deposits. Now we are swiftly advancing the shipment for Proseo machines, aiming to convert these intention orders into actual sales contracts as quickly as possible. Based on our my personal experience in the weeks following the halving, miners will gradually start their computing power purchases, preparing for the new 4 year cycle.

Speaker 1

This process will also initially reflect in volumes and supply and the demand dynamics shift, computing power prices is expected to recover more quickly. However, we need to note that the Fed's interest rate cut cycle has not yet begun, resulting in high financing costs for miners and there's uncertainty regarding the timing of Bitcoin price increases, posting challenges to the industry. Based on the comprehensive situation described above, we maintain a cautiously optimistic outlook for the 2nd and third quarters of 2024. For the Q2 of 2024, the company expects total revenue to be approximately USD 70,000,000 For the Q3 of 2024, the company expects total revenue to be approximately $70,000,000 This forecast is based on the current market and operational conditions of the company, and the actual results may vary. Overall, the period leading up to the 2024 Bitcoin halving, including the entire Q1, was a super wait and see season for the money machine market.

Speaker 1

However, we also witnessed many positive changes within the industry and at the company's level. At the beginning of 2024, the Bitcoin spot ETF was approved for listing by the U. S. SEC. And by the end of April, the Hong Kong Stock Exchange approved the listing of multiple currencies for EPS.

Speaker 1

These milestone events will further encourage traditional finance to participate in Bitcoin's development. By the end of the Q4, the price of Bitcoin reached a new all time high of $73,000 On April 20, the Bitcoin trading system, which has been operating smoothly for 15 years, completed its 4th halving schedule, starting a new 4 year cycle. This series of events confirm that the Bitcoin trading system has formed a strong consensus and continuously expanding its user base, forming a closer connection with traditional finance, all of which indicate a broader potential of industry growth. Looking at the underlying operation of Bitcoin Trading System, which the smooth completion of the halving, we anticipate that, on one hand, existing miner will face a new wave of equipment upgrades. On the other hand, as the Bitcoin price stabilizes and increase after halving, more miners are expected to join the mining activities, which will significantly boost the demand for computing power.

Speaker 1

However, due to the limited production capacity on Bitcoin computing power supply side, the shift in supply and demand relationships may potentially drive the prices of computing power up. The company's A14 products are being delivered successfully and the new A15 series products have debuted and opened for presales. And our one stop comprehensive mining solutions and our Nano 3 products are being brought to market. They are gradually gaining recognition for more customers. On the product side, the company is addressing to diverse needs of different customers with a richer and more efficient selection of products.

Speaker 1

At the same time, we continue to lock in production capacity on the supply side with advanced process and comprehensively reach customers at the sales level. Recently, the company's management, including myself, announced a proposed ownership expansion plan. We are very confident in seizing the market opportunities, driven by the certain demand path rate continuously supporting the Bitcoin network with our computing power and creating long term value for shareholders. This concludes my prepared remarks. Thank you, everyone.

Speaker 1

I will now turn the call over to our CFO, Zhen. Thank you.

Speaker 2

Thank you, Angie, and good day, everyone. This is James speaking at our Singapore headquarters. As Engie started at the top of the course, this quarter was a super wait and see period that occurs every 4 years as the last complete quarter before the halving event of Bitcoin. Despite the subdued market, we continued to execute our strategy. 1st, we were committed to wafer capacity investments and R and D activities of new generation machines.

Speaker 2

This allowed us to mass deliver A14 series since April to upgrade our products achieving breakthroughs in A15 series and to enrich our product portfolio with Avalon Nano 3 and integrated mining solutions. Secondly, we enhanced flexible and multichannel sales strategy to enable us to accelerate destocking of existing products and accumulate contract sales orders for A14 series. Thirdly, we adhere to our own mining strategy, continue to expand the mining deployment and strive for operation excellence. Last but not least, we continued to manage cash in a prudent way and streamline our expenses to make sure strategical tickets be prioritized. Let's start the introduction from profit and loss.

Speaker 2

Q1 total revenue was US35 $1,000,000 which beat our guidance by $2,000,000 or 6%. Our revenue from machine sales was $23,000,000 and our mining revenue was USD 10,000,000 Regarding our machine sales, we delivered a total computing power sold of 3,400,000 terahash per second, representing a year over year decrease of 20% and a quarter over quarter decrease of 38%. And the average selling price decreased from $8.2 per terahash per second in quarter 4 to $6.9 per terahash per second in quarter 1. Coupled with multiple factors including before having the New Year and the Lunar New Year, the market demand in this quarter was quite weak. And we could only sell currency inventory of older generation products.

Speaker 2

These factors lead to the decreases of our computing power sold and average selling price. From sales side, we were committed to execute a multichannel sales strategy. Our distribution channels in Southeast Asia performed in a good way, contributing US5.7 million dollars to our total quarter 1 revenue, representing a 27% sequential growth. We continued to gain from Southeast Asia region after moving headquarters to Singapore and developing distribution channel in different countries like Thailand, Malaysia and Indonesia. I'd like to discuss the orders and revenue of our integrated mining solutions, which diversified our product revenue streams.

Speaker 2

In quarter 1, we received customer payments of US4.9 million dollars from purchase orders for our integrated mining solutions. These orders are gradually delivered. Therefore, 0.2 million was recognized in quarter 1 revenue. The remaining USD 4,700,000 will be delivered in quarter 2 and contribute to our quarter 2 revenue. Specifically, for our mining machine sales, we accrued $47,500,000 for inventories write down, prepayment write down and the provision for inventory purchase commitments in this quarter, representing a 14% decrease sequentially.

Speaker 2

The decrease was driven by accelerated destocking in this quarter. Those non cash write downs and provisions are made under U. S. 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 of $0.1 million for mining machine sales.

Speaker 2

Turning to our mining businesses. Our mining revenue increased 182% quarter over quarter. We mined 195 bitcoins in this quarter, an increase of 92% over the last quarter. The increases were not only driven by increases in bitcoin prices, but also by increases in our energized hash rate. Our average revenue per bitcoin in quarter 1 increased 47% over the last quarter from almost US37000 dollars to almost US54000 dollars Our energized computing power in Kazakhstan recovered to 1.1x Hash in quarter 1.

Speaker 2

We also further expanded our mining business in Africa, increasing our energized Hash rate to 0.9x Hash. At the end of quarter 1, our energized harsh rate totaled 3.0xhush per second, increasing 58% over the last quarter. Our mining profit was 121 bitcoins, which increased 2 50% compared to the last quarter. Gross profit doubled quarter over quarter to US3.5 million dollars for our mining business. Please note here that mining profit or loss is defined as mining revenues net of costs for energy and hosting, but without consideration of depreciation for the deployed machines.

Speaker 2

Now turning to expenses. Our operating expenses totaled US31 million dollars decreasing 19% year over year and 22% quarter over quarter, respectively. Staff costs, including share based compensation, decreased 27% year over year and 11% quarter over quarter, driven by organizational optimization performed in quarter 4 last year. As the Bitcoin price rose, no further impairment for our self mining machines was accrued in this quarter, which reduced the operating expenses by US6 $1,000,000 compared to the last quarter. I want to point out that we chose to early adopt the SASB new accounting rules on cryptocurrency assets since January 1, 2024, which allow cryptocurrencies to be carried at their fair market value.

Speaker 2

According to these accounting rules, the cumulative effect of US19 $1,000,000 was recorded to the opening balance of our retained earnings. As the Bitcoin price increased from US42000 dollars on January 1, 2024, to US70000 dollars on March 31, 2024, again on fair value change of $33,000,000 was recognized in our quarter 1 profit and loss. As the 2nd tranche of preferred shares was issued in January, we recognized the remaining converted preferred shares as a liability and recorded a non cash gain on fair value of US2 $1,000,000 according to US accounting rules, compared to a non cash loss of US10.9 million dollars in quarter 4. Benefiting from the narrowed gross loss, the lower expenses and the gain from the fair value change of cryptocurrency and financial instruments. Quarter 1 net loss was US39 $1,000,000 narrowing 72% quarter over quarter and 53% year over year.

Speaker 2

Turning to our balance sheet and cash flow. In quarter 1, we generated US48 million dollars of cash inflows from sales, received US50 million dollars from preferred shares financing facilities and $10,000,000 from export VAT refunds. We paid $88,000,000 to secure our wafer supply and $61,000,000 for production and operation. Our increasing investment in wafer supply is aimed at enabling the concentrated delivery and spot sales of our A14 series products in the following quarters. Consequently, at the end of quarter 1, we held cash and cash equivalents of US55 $1,000,000 on our balance sheet.

Speaker 2

Now moving on to our contract liability. Our A14 series has continued to be popular since the pre sale beginning in late 2023. The balance of contract advances reached US39 $1,000,000 as of this quarter end, nearly doubled from US19.5 million dollars at the end of the last quarter. As of the end of quarter 1, we recorded account receivable of US1 point $6,000,000 a decrease of 45% compared to the last year end. 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 asset kept growing in this quarter and reached a record high of 10.57 Bitcoin as of March 31, which is 148 more than 909 at the end of last year. As previously mentioned, we adopted the FASB new rules effective January 1, 2024. On March 31, the fair value of our owned Bitcoins totaled $75,000,000 Combined, our balance of cash and owned bitcoins demonstrated approximately $130,000,000 of liquidity. Turning to our fundraising.

Speaker 2

In early January 2024, we closed the 2nd tranche of our preferred shares financing, raising total net proceeds of US49.9 million dollars This has been reported in the previous quarterly release. After that, we have not done any fundraising. We expect our quarter 2 revenues to be US70 $1,000,000 and quarter 3 revenues to be US70 $1,000,000 respectively. We are glad to see that our A14 products are being successfully delivered. The new A15 series products have debuted and opened for presales and our one stop comprehensive mining solutions and Avalon Nano 3 products are gaining recognition from more customers.

Speaker 2

We will continue to address the diverse needs of our varied customers with a richer and more efficient selection of products. This concludes our prepared remarks. We are now open for questions.

Operator

Thank you. We will now begin the question and answer session. 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 the management in Chinese, please immediately repeat your question in English. First question comes from the line of Kevin Dede from H.

Operator

C. Wainwright. Please ask your question.

Speaker 3

Hi, James. Yes. Hi. MG and James, thank you very much for having me on the call. Can you hear me okay?

Speaker 3

Yes.

Speaker 1

Yes.

Speaker 3

Okay. Great. Okay. So, Angie, right off the bat, I'm going to apologize because my first question is long and a little convoluted. But I think you'll understand where I'm going and I know you gave me a great answer.

Speaker 3

So I'm wondering how these all these factors combine together. Number 1, we have the many Kanan new products coming to market. We have the A14, we have the A15 coming soon and the A16 in R and D. So I'm wondering how you balance product cycles against the fact that liquid cooled machines tend to last longer and semiconductor improvements are incrementally less from process geometry change to process geometry change.

Speaker 1

Yes. Good morning, Kelly. Thanks, Angie. Yes. For I think in the term of our major product series, we are still in cycle of iterating generations roughly every 3 quarters.

Speaker 1

This pattern also applies to our next generation product. I think this is beneficial for both customer choices and Hash rate deployment signing because you have a quite clear prediction of our new products. And in terms of power efficiency, our mainstream products released last year have entered the range of 20 to 25 draws per terahertz and with the products first half of this year are in the 15 to 20 jaws per tonnehush range. And I believe the next target for the industry will be in the 10 to 15 draws per cash later this year or early next year. These R and D efforts are progressing systematically.

Speaker 1

Yes. So also I want to mention, apart from the chip developments, we are actually accelerating in the chip to machines to mass and to mass production stages. I will have example here, the A15 LASH has an example, yes. We went from receiving the chips to have a stable running machine in less than 72 hours. And within less than 10 days, multiple proto machines with excellent performance and stable operations were showcased in public events like Expedia.

Speaker 1

And yes, for today, we are in the process of sending fresh portal machines to customers for testing. Yes, so we are continuing to improve our user experience. Yes. And yes, we have comprehensive solutions for from the machines to like the out of the box containers, even the consumer nano3 products. Yes, so I think this will give you some guidance for the what will happen in the next like 18 months or 2 years.

Speaker 3

Okay. Thanks, Andy. You made it very clear both James and you made it very clear that you're holding over 1,000 Bitcoin. And I'm wondering, I'm sure many people are wondering how you consider that. Would you consider selling them at some point in order to raise capital, in order to fund your business?

Speaker 3

I understand $88,000,000 for a wafer run, that's a lot of money. So just kind of I'm just kind of wondering how you're thinking about that.

Speaker 1

I think for the Bitcoin we are trying to hold in, today, our company's policy is only use the Bitcoin to pay the mining electricity bill and all of other Bitcoins we will hold. And also when we receive some bitcoins from our small cells, we will hold most of them. I mean, we will hold most of the profit from the sale. Yes, and we currently, we have no plans to sell the bitcoins. But I think we are considering to make the maybe do some like financing operations to let the bitcoins generate more bitcoins.

Speaker 1

I think maybe James can help some matter on this.

Speaker 2

Yes. Currently, we are starting on different approaches as using bitcoins as collateral and also can generate new financing interest either in Bitcoin or in other cryptocurrencies like USDP. So we are talking to different vendors to see the possibility and the potential to generate more cash flows and profit for our shareholders. I think we are still in the starting phase. And once we get some solutions, we will let our investors know that.

Speaker 2

Thank you, Kevin.

Speaker 3

Last question for me. Okay. Last question for me. Just curious about your perspective on the competitive environment. Obviously, Yihan Wu is back in the market a bit dearer.

Speaker 3

The Auradigm machines are expected to come out this year. I appreciate your perspective on Kanan's revenue. You obviously a pretty bright outlook. I'm just wondering how you see that competitive environment shaking up?

Speaker 1

Thank you, Kevin. Yes, we have also noticed some new entries in the market recently. Some have announced that their designs are in the tapered space, while others have shared results from black chip testing. However, I think result expectation, we have not see back machine deliveries in the open market yet. So once machines are actually delivered to the market, we will conduct some research.

Speaker 1

However, we cannot comment on products that have not been delivered. I think the entry of new players indicates that the bull market for mining machines is approaching. It's many things the industry appropriate prospect and closing to invest and enter the market. At the same time, this phenomenon also suggests that the industry, including our sales, inevitably have areas that not fully satisfy our market partners or our customers in terms of like products, pricing, customer service, customization, sales coverage. I think this led us to accelerate progress and improvement.

Speaker 1

So as entry of these new players clearly brings more relative to the industry, But of course, the barrier to enter the mining machine business is extremely high now. And developing and I think developing an excellent mining chip is already very challenging at this stage. However, this is like exactly just the beginning of the journey of hardships was growing into an excellent brand and the road ahead is indeed long. It has been 11 years since IPV was the 1st award for us as a Bitcoin mining machines to customers. And although we have accumulated a lot of experience over time, my respect for this industry has only grown.

Speaker 1

And so in preparation of this cycle, we have made a lot of preparations, including not only a road map for new products, but also production capacity deployment. I think additionally, as many machine providers, we must continuously to serve our customers, especially during industry downturns, which is not easy. I think I have endured several past cycles, only a few, including us, have persisted and we are the only one among them that is publicly listed company. So sorry for it's a little bit long. Thank you.

Speaker 1

Okay.

Speaker 2

Thank

Speaker 3

you very much, gentlemen. I appreciate you taking the time to answer my questions. Thanks for having me on the call.

Speaker 2

Thank you, Kevin. Thank you.

Operator

Thank you, Kevin. Our next question comes from the line of Shuang Sun from Caution Securities. Please ask your question, Shuang.

Speaker 1

You mean the performance or okay. Yes, I think for yes, I think we have already demonstrate our A315 series. The model is A1566 in the Hong Kong event. And with an average computing power of 185 terahash per second and a power efficiency of better than RMB18.5 per cash. I think this performance is on par with competing products currently on the market.

Speaker 1

Yes. And so I think at this stage, we are preparing the portal machines to our customers to demonstrate the machines on the field. So everything is going very smooth. We hope we can push it to mass production as soon as possible. Yes, but there's really a non production period due to the cutting edge technology.

Speaker 1

So it just feels some months away.

Speaker 2

Please share your review of the continuity of the company's operation. Thank you, Sean. I will take this question. I think, first of all, we should take a look at our balance sheet. In the end of March 31, we have $55,000,000 cash on hand.

Speaker 2

And also, we have another 10.50 7 bitcoins. As of today, it equals like $65,000,000 Putting this together, we have the liquidity total liquidity like $120,000,000 together. And in quarter 1, our expense together is about $31,000,000 which including like onethree of the expense is non cash expense. So actually, the cash expense for routine business is like $20,000,000 per quarter. So RMB120 1,000,000 compared to the RMB20 1,000,000 spending.

Speaker 2

So that means another six quarters to go if we don't do anything. But of course, we are doing preparations for global market. We have to be very careful about the cash management. I think currently, we have already seen a lot of improvements from cash inflows as the A14 series has already been delivered on schedule and we have already collected cash gradually from our customers. Step by step, we will collect more cash in quarter 2 and quarter 3 as we predicted the revenue will be higher.

Speaker 2

And also most of the credit customers have already completed the payments for their orders and our account receivables have decreased sequentially. The sales cash inflows, I think, has already been showed in the customer advances, doubled the previous customer advances. So I think from the inflows, a lot of good news. On the other hand, we have to control the capacity or pace and locking proportion of cash into mass production. That's something we have to do.

Speaker 2

That's why in quarter 1, our cash payment to lock the waiver is about $88,000,000 So it's a lot. So putting this together, while we maintain a safe level of cash reserves, while we have more than 1,000 coins, we have a substantial potential liquidity safeguard on hand. Looking to me, it's quite safe. Overall speaking, the company is able to maintain continuous operations with overall risks being relatively controllable. But of course, we have to work very carefully in a prudent way to manage the cash.

Speaker 2

Thank you for the questions, Shuang. Please share your view on the timing of return to profitability this year. Yes. I think profitability is always a question from investors. People would like to see the bear market end and to see our profit coming back as the bull market.

Speaker 2

I think the most interesting thing in our industry is the average selling price. I think we can see our past 3 years average selling price could be below $7 per terahash or above $70 per terahash. So I think the main factor driving profitability is still the increase in computing power prices. I think this fundamental reason behind the rise in computing power prices is still the shift in supply and demand dynamics. As the price of Bitcoin increases, attracting more miners into the market, there could be a surge in demand for computing power.

Speaker 2

With this kind of condition, under such cases, given the limited supply capacity of the advanced process using in our mining machines, I think the price of computing power could potentially rapidly increase. So therefore, it is anticipated that after halving, as our Bitcoin price is still fluctuating, but after it is stabilized and rise, the total network computing power decreases, the expanded profitability of mining could potentially attract a large number of new miners coming in. So as miners begin to purchase computing power, sales volume will initially react. And as the supply demand relationship changes, computing power prices will quickly recover. So currently, computing power prices have already been recovering from the market low.

Speaker 2

Our current assessment is that losses loss could continue through the 1st 2 or 3 quarters of 2024. But there is a big potential opportunity for gross margin to turn positive or even significantly improve in the 3rd and the 4th quarter, especially the 4th quarter. So for the full year, we will try our best to see if there is any possibility to get breakeven. But it looks to me the trajectory will be from the loss to earnings in the coming 1 year time. Step by step, we will be there.

Speaker 2

Thank you, Do you still have financing plan going forward? I think after 814 series shipment, we have already seen more active purchasing inquiries and a stronger sales cash inflows after halving and after our A14 series shipment. So it looks like the cash flow operations and the balance sheet are also improving. So I think as just mentioned, we have already did the financing in quarter 4 and quarter 1 of 2024 with the total cash like $136,000,000 We do not have any urgent equity financing plans in the near term. So I think that's a clear answer.

Speaker 2

We do not have urgent equity financing plans in the near term. Thank you, Shuang.

Operator

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

Speaker 2

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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Key Takeaways

  • In Q1 2024, Kennen Inc. reported US$35 million total revenue, beating guidance by 6% with US$23 million from mining machine sales and US$10 million from mining operations.
  • The company officially launched its A15 series at Bitcoin Asia 2024, ramped A14 machines into mass production and is advancing R&D on the next-generation A16 series to boost computing power and energy efficiency.
  • Mining operations grew energized hash rate by 58% quarter-over-quarter to 3.0 EH/s, mined 195 BTC (up 92% QoQ) and now hold 1,057 BTC valued at over US$65 million.
  • With US$55 million in cash and US$65 million in Bitcoin holdings, the company maintains approximately US$120 million in liquidity, has no urgent equity financing plans and has invested US$88 million in wafer capacity.
  • For Q2 and Q3 2024, Kennen expects revenues of about US$70 million each and remains cautiously optimistic that post-halving market dynamics will drive computing-power price recovery and margin improvement.
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Canaan Q1 2024
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