Canaan Inc. Q4 FY2023 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to Canaan Inc.'s Fourth 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. The Company's financial and operation results were released by the news wire 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 fourth quarter 2023 earnings call on the Company's IR website. Joining us today are Canaan Inc.'s Chairman and CEO, Mr. Nangeng Zhang, and CFO Mr. Jin Cheng James. 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. 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. 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 website. With that, I will now turn the call over to our Chairman and CEO Mr. Nangeng Zhang. Please go ahead sir.

Hello, everyone. This is NG, the CEO of Canaan. Thank you for joining our conference call. Our CFO James Cheng and I are at the Company's headquarters in Singapore to share our quarterly results with you. 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 the end of the interest rate hike cycle and upcoming approval of a Bitcoin spot ETF have made industry participants, including miners, more optimistic about the future. As a result, both production and sales exceeded expectations in this quarter, especially in December. As the halving event approaches, mining equipment providers are also stepping up destocking efforts with the theme of small profits for fast turnover remaining prevalent this quarter, keeping product ASPs low as effective. In such a rapidly changing market environment, we seized the favorable market window of this quarter, especially in December, achieving a total revenue of U.S. $49 million, including mining machine sales revenue of U.S. $44 million, much higher than management's expectation of U.S. $34 million revenue in the third 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&D and operational efficiency, increasing investment in production capacity, diversifying mining operations and exporting international markets such as North America, Southeast Asia and the Middle East. Completing financing in the capital market with sufficient funds enables us to deploy in advance and meet the explosive demand in the upcoming bull market. Now let me go into more detail. After announcing A14 series miners on September 25, 2023, we continued 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. The A14 series miners 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 third and fourth 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. These benefits increase customer willingness to purchase our mining machines, putting us in a favorable position in streams 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. 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 the inventory allocation between contract sales, spot orders and mining business. At the end of the fourth quarter, we once again entered into procurement agreements with publicly listed companies such as Cipher Mining, Inc. and Stronghold Digital Mining, Inc. This includes a contract sales order from Cipher for 16,700 units of A1466 mining machines and another order from Stronghold for 1100 units of the A1346 mining machine. Additionally, earlier deliveries include 11,000 units of A1346 model to Cipher and 2000 units to Stronghold, all of which have been delivered to their respective mining sites and installed by the fourth quarter operating smoothly. In the Southeast Asian region, where we focus on channel sales, we achieved sales of 900,000 terahash per second of computing power in the fourth quarter, contributing to stable sales orders. Our online retail store targeting overseas markets expanded their reach to four new regions, including Norway, the Dominican Republic, Paraguay, and Israel, totaling 46 regions reached by this quarter, meeting the purchasing needs of decentralized individual miners worldwide. Benefiting from factors such as increasing Bitcoin price, transaction fee rewards, and improved uptime, we achieved mining revenue of approximately $3.7 million in the fourth quarter, representing a growth of about 14% compared to about U.S. $3.3 million in the third quarter. In the fourth quarter, we mined a total of 101 Bitcoins. The company continues to maintain a holding strategy in its Bitcoin mining business. As of the end of the fourth quarter, we held 909 Bitcoins belonging to the company, reaching a historical high. The current market value of our Bitcoin assets is almost U.S. $50 million. At the end of the fourth quarter of 2023, our total energy mining computing power was 1.91 exahash per second. 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 have commenced reenergizing our mining machines in the first quarter of 2024 and the majority of them have now been successfully reenergized. 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. First, when selecting project opportunities, we will pay more attention to factors such as legal system and regulatory stability in the project's located region enhancing risk control. We will expand our scale while ensuring the security of our company assets. 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 span, 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 eleven 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 fourth quarter of 2023, mainly due to the reenergization of some machines in Kazakhstan and the energization of machines in other projects. As of today, we have 2.1 exahash per second of expected computing power to be installed. This refers to the computing power that Canaan has shipped to a targeted mining country, but has not yet been put on shelves, and we expect to gradually install and power it up in the first 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 shelves. Based on the estimated total computing 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 kilowatt hour and a weighted average revenue share ratio of around 70.9%. In the fourth quarter, 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 adjustments, we have a linear and more efficient team which is well prepared for the bull market. Our sales efforts resulted in a significant increase in sale cash inflows despite some noncash provisions and impairments associated with promotional interactives. These interactives enable us to generate crucial cash inflows and our destocking efforts are near completion. In general, our strong sales traction and fundraising contributed to a robust increase in the ending cash balance in Q4 2023. In the fourth quarter of 2023, through the issuance of preferred shares and ATM offering, the company has secured a net financing amount of about U.S. $86.2 million. In the first quarter of 2024, the company received another U.S. $50 million of financing through the settlement of preferred shares. In the early stages of last year's fourth quarter, we made the judgment that the bear market was bottoming out and the bull market was approaching. However, based on experience, market changes during the bear to bull transaction were very rapid, requiring early preparation of the supply chain and product layout. In the past, we relied on internal funds and proceeds from customer advancement. Cash from these resources was slower 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 related production capacity preparations by at least two months. This enabled increased investment in research and development and accelerated product development progress. From a longer perspective, the benefits delivered may even exceed the two months time frame, positioning us to capitalize on significant market opportunities in the bull 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 entered a brief consolidation phase and recently broke through and stabilized around U.S. $50,000, with a combined effect of improved sales and successive financing settlements. Our cash and cash equivalents increased from U.S. $41 million at the end of the third quarter to U.S. $96 million at the end of the fourth 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, posing ongoing challenges to the industry. The first quarter of 2024 is also the last complete quarter before the halving event, and based on our past experience, this quarter is a significant wait-and-see period that occurs every four years. Coupled with the multiple factors of the halving, the New Year, and 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 second quarter. Based on the comprehensive situation of the market, we are providing a cautious outlook for the first half of 2024. We anticipate a revenue of approximately U.S. $33 million in the first quarter of 2024 and approximately U.S. $70 million in the second quarter. This forecast is based on the company's current market and operating conditions, and the actual results may vary. 2023 was a challenging year for the entire industry with unwavering phase; we overcame a variety of obstacles and successfully navigated through the market downturn as planned. Even during such times, we enhanced our corporate governance and made extensive preparations for the halving and the bull market. What doesn't kill me will only make me stronger. We have never been more confident in seizing the historic opportunities presented by the Bitcoin 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 a price of $69,000 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. We will continue to work diligently supporting the Bitcoin system with computing power and over the next four 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, NG, and good day everyone. This is James speaking at our Singapore headquarters. As NG has stated at the top of the call, Bitcoin price grew significantly in quarter four, especially stayed high in December and the market demand for machines quickly recovered before total hash rate exceeded 500 exahash 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. Our strong sales, collection and fundraising contributed to a positive ending cash balance, which reached U.S. $96 million at the end of quarter four, increased from U.S. $41 million at the end of quarter three. Frankly speaking, those were a series of better results beyond our previous expectations in November. Let's start with profit and loss. Quarter four total revenue was U.S. $49.1 million, which beat our guidance of U.S. $34 million by 44% favorable variance and represented an increase of 47% quarter-over-quarter. Our revenue from machine sales was U.S. $44 million, and our mining revenue was U.S. $3.7 million. Regarding our machine sales, we delivered a total computing power sold of 5.5 million terahash per second, representing a year-over-year growth of 192% and a quarter-over-quarter growth of 46% as the average selling price increased from $7.9 per terahash per second in quarter three to $8.2 per terahash per second in quarter four. 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 900k terahash per second delivery in quarter four, mainly from distributors and our online store first time covering the Kingdom of Norway, Dominican Republic, Paraguay and Israel. Total country and areas with shipments reached 46 for the first time. Demand from more and more small scale miners was satisfying. Considering both factors of power sold and ASP, our revenue from mining machine sales achieved U.S. $44 million, up 49% from U.S. $29.5 million 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 third and fourth quarters. Accumulated orders from customers was higher than $4 million, driven by customer recognition of our integrated cooling technology. The revenue from integrated mining solutions in quarter four was U.S. $0.6 million, up 133% from U.S. $0.2 million in quarter three, driven by the increased delivered volume. Specifically, for our mining machine sales, we accrued U.S. $55.5 million for inventory write-down, prepayments write-down, and provision for reserve for re-inventory purchase commitments in this quarter. The inventory write-down decreased sequentially by 16% to U.S. $45.1 million, which was driven by the accelerated destocking in this quarter. Those write-downs and provisions are made on the 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 for our mining machine sales of U.S. $0.7 million 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 1.9 exahash per second at the end of quarter four. We mined 101 Bitcoins in this quarter and achieved 35 Bitcoins for mining profit. Gross profit margin reached a record high of 41% for our mining business in this quarter, which was mainly attributed to the average Bitcoin price increase from about U.S. $28,000 in the last quarter to over U.S. $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. 1.9 exahash per second out of 2.0 exahash per second in Kazakhstan have been successfully reenergized to normal in early January. That makes our total energized computing power 2.8 exahash in quarter one 2024, which has been deployed in six countries and areas. This enables us to expect a material mining revenue increase in quarter one 2024 compared to quarter four, and we continue to expand our mining business with another 2.1 exahash per second machines to be energized in quarter one and quarter two as CEO mentioned previously. Shifting to our AI business, AI revenue was U.S. $0.3 million in this quarter, up 59% quarter-over-quarter. This also was primarily driven by the increased sales volume of our AI products. Now, turning to the expenses. Our operating expenses totaled U.S. $39.2 million, decreasing 36% year-over-year and 10% quarter-over-quarter respectively. Excluding the one-off expenditure for our new generation chips incurred in quarter four 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. 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&L by offsetting G&A expenses rather than contributing to the revenue. Besides, in this quarter, we incurred a one-off expenditure of U.S. $2.2 million 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 one in 2024. The net result of the foregoing was a non-GAAP operating loss of U.S. $78.3 million for this quarter, narrowed by 29% year-over-year and 20% quarter-over-quarter respectively. Benefit from the noncash recognition for deferred tax assets, non-GAAP net loss was U.S. $53.9 million, narrowed by 30% year-over-year and 17% quarter-over-quarter respectively. Please note that according to U.S. GAAP accounting rules, we recognized the first closing of preferred shares financing as convertible liability, the second closing of preferred shares as forward liability, and the pre-delivery ADS as own share lending equity respectively. These financial instruments incurred an excess of fair value over proceeds received and a fair value change. These noncash accounting treatments hit our Q4 bottom line with a total reduction of U.S. $70 million. In order to represent our performance more accurately and more comparably, we excluded these impacts from our non-GAAP measures. In addition, although legally issued, the pre-delivery ADS were not considered outstanding, then excluded from basic and diluted earnings per share. Turning to our balance sheet and cash flow. In quarter four, we received U.S. $61.2 million from the ATM and U.S. $24.8 million from preferred shares financing facilities respectively, and we paid U.S. $35 million to secure our wafer supply by utilizing the fundraising proceeds. The other proceeds were also utilized for wafer supply prepayment in January 2024. During this quarter, the cash outflow of $71 million for productions was offset by cash inflow of U.S. $75 million from sales, which was mainly contributed by spot sales of A13 series and advanced payment for A14 series. So our cash flow from production operation turned positive with U.S. $4 million. Consequently, at the end of 2023, we held cash and cash equivalents of U.S. $96 million on our balance sheet, which was U.S. $55 million 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 U.S. $19.6 million as of 2023 year end. This balance increased 28.6 times compared to U.S. $0.7 million at the last year end, and 2.5 times compared to U.S. $5.6 million at the last quarter end. The majority of contract advances came from presales of A14. It included, but not limited to sales contributions from big clients. As previously announced, we secured follow-on purchase orders from Cipher and Stronghold with over 17,000 mining machines. As of the end of quarter four, recorded account receivables was U.S. $3 million declining 69% compared to the end of quarter three as a series of payments have been made by customers during quarter four. We will continuously evaluate market demand and adopt corresponding credit policies with caution. Now turning our attention to our Bitcoin assets. The Bitcoins we held as our own holding assets kept growing in this quarter and reached 909 Bitcoins as of December 31, which is 49 more than 860 at the end of quarter three. We also held 169 Bitcoins received as customer deposits, which declined by 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 allows 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 U.S. $18 million based on the latest price difference between market price and the booking price. The current fair market value of those owned Bitcoins is almost U.S. $50 million. 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 U.S. $61.2 million. In late 2023, we closed the first tranche of preferred shares financing, raising total net proceeds of U.S. $24.8 million. In early January 2024, we closed the second tranche of preferred shares financing, raising total net proceeds of U.S. $49.7 million. The total proceeds of U.S. $136 million from fundraising helped us carry out new product R&D and wafer capacity preparation to secure future mining machine supply after halving. In the first quarter of 2024, we anticipate a revenue of U.S. $33 million considering many of our customers are waiting for halving to generate more visibility about ROI of CapEx investment, while for quarter two 2024, we anticipate a revenue of U.S. $70 million considering A14 series preorder volume and the potential demand upside after halving. 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 face unforeseen obstacles. Based on the above comprehensive situation, we provide a cautious expectation for the first half of 2024. Now, I would like to briefly walk you through our financial results for the quarter. Revenues in the fourth quarter of 2023 were U.S. $49.1 million as compared to U.S. $33.3 million in the third quarter of 2023 and U.S. $58.3 million in the same period of 2022. Gross loss in the fourth quarter of 2023 was U.S. $54.1 million compared to U.S. $69.1 million in the third quarter of 2023 and U.S. $64.1 million in the same period of 2022. Total operating expenses in the fourth quarter of 2023 were U.S. $39.2 million, compared to U.S. $43.8 million in the third quarter of 2023, and U.S. $60.8 million in the same period of 2022. Non-GAAP loss from operations in the fourth quarter of 2023 was U.S. $78.3 million, compared to U.S. $97.4 million in the third quarter of 2023 and U.S. $110 million in the same period of 2022. Non-GAAP net loss in the fourth quarter of 2023 was U.S. $53.9 million, compared to U.S. $64.7 million in the third quarter of 2023 and U.S. $76.6 million in the same period of 2022. Non-GAAP basic and diluted net loss per ADS in the fourth quarter of 2023 were U.S. $0.30. As of December 31, 2023, the company had cash and cash equivalents of U.S. $96.2 million. This concludes our prepared remarks. We are now open for questions.

Thank you. We will now take our first question. Your first question is from Shuang Sun from Guosheng Securities. Please go ahead.

Can you hear me?

Yes, please.

How was your recent custom order? Did you see increased sales in mining machine sizes as miners more aggressively stock mining machines in preparation for the halving?

In Q4 2023, we exceeded our expectations in both our sales and presales orders. Total computing power sold reached 5.5 million terahash per second in this quarter, a year-over-year increase of 192% and a sequential increase of 46% from the previous quarter. After the approval of the spot Bitcoin ETFs in January this year, the Bitcoin price went through a consolidation phase and market experienced a slight slowdown in orders compared to Q4. This is a normal phenomenon, based on our past experience and observations. Usually it's six months before the halving. Miners who have existing facilities may deploy mining machines quickly to maximize profits. However, about a quarter before the halving, miners tend to adopt a wait-and-see stance. Most miners prefer to make plans for the procurement and deployment of mining machines for the upcoming full year cycle when they see more certainty. Generally around one month before the halving, market indicators are mostly stabilized and the 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&D and improvements of our next generation products. Thank you.

Okay. Has the price of computing power increased? How did spot sales compare to contract sales? What was the sales volume and average selling price of mining machines with higher power efficiency?

Entering Q1 2024, the approval of the spot Bitcoin ETF for listing led to a market correction following the initial surge. Despite this, there has been an intense effort from mining machines manufacturers to destock without an 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 prices have seen gradual increases over the past four months. It is anticipated that the majority of A14 series deliveries will be concentrated in the second and third quarters. In Q4 2023, spot sales reached computing power of 5.47 million terahash per second and with the presale orders surpassing 7.5 million terahash per second. So the A14 series, with its enhanced computing 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 for spot purchases. This reflects a variety of needs among the miners. Thank you.

Thank you very much, operator, and good day, everyone. So my question is a little bit higher level. Given the environment we're in, with resurgent interest in Bitcoin and the network and obviously the ETF approval, how aggressive do you want to be? 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 halving, I’m just curious how you kind of navigate between greed and fear in this environment. Thank you very much for your perspective.

Yes, it's a very interesting and high-level question. I think there are many uncertainties before the halving. For us, we believe that our motto is to have there only three significant players in this field. We need to make targeted adjustments and customize our product designs with the best power efficiency and competitive pricing. Also, AI is booming. So we need to secure the wafer supplies, especially for the second half of this year. We have already signed some agreements with our suppliers and for us, I think we are changing our strategy for self-mining. Previously our target was for cash flow, but from this year we are shifting our strategy to growth. So that means we will start to invest in facilities and use our best products for self-mining, especially we will focus on well-regulated and developed countries. Yes, I think for the next few months, we have sufficient funds for us to do the production and R&D. But for the bull market, if we determine the timing is right, we will use the capital to expand more aggressively than before. So I think the best products and our self-mining strategy, along with capital, will make us perform better in this bull market cycle. I think Jim can elaborate further.

Yes, I think it's always difficult or challenging to balance between being aggressive and conservative. We do fundraising to support our R&D and our capacity of wafer for the future bull market. I think we always make decisions together and NG has a lot of experience going through the past cycles. So we always predict the bull market and bear market for the future and then decide together how big the investment we are going to spend on new machine design. A lot of past experience helped us. But we always face two new challenges. Just like mining, just like in different generations of machines, we have to solve a lot of challenges in the R&D phase. So I think it's not easy to describe all the operations, but we do carry the courage to face the uncertainties and maintain a balance between being very aggressive and very conservative. We try to maximize the performance of machine sales and mining revenue together. So I think strategically NG has led the company through all this. But we do have a management team in different areas trying to contribute our best to the decision-making. I think that's my two cents. Thank you, Lucas.

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’s question about strategic objectives, I understand you're at about 4.9 exahash 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.

Hi Kevin, what I want to mention again is we started our self-mining business in the second half of 2021. We have been deploying many projects and I think gaining both experience and licenses. So we have deployed more than 5 exahash per second of computing power and energized over 28 exahash per second through like Central Asia, North Africa, South America, and the Middle East, and so on. But in 2024, while maintaining our mining strategy, this year, we will adjust and upgrade our specific operating tactics. Firstly, we will pay more attention to factors such as the legal system and regulatory stability to enhance risk control. This means we will change our major targets and major regions for our mining operations, even though it may be a little bit costly or may take slightly longer deployment time. We will also expand our scale. We will shift from cash flow-oriented to growth-oriented. This means that in the past when we had inventories, we would use those to do self-mining, generating cash flow for the company. Now, our target is to grow the self-mining business not just for cash flow. This means we will use our best models for self-mining. Using better machines will prolong your investment span and reduce operational risks, such as the risk of mining revenue not covering power costs. This also extends the lifetime of the entire investment. Yes, and also in the past, maybe we cooperated with hosting companies and did not have self-held facilities. But today, after over two or three years, I think we have learned that the value of stable facilities and power resources is really very important for this industry. So we will go deeper to participate in mining operations and explore more collaborations. Thank you.

Yes, Kevin. One thing to mention here is that the whole deployed hash rate is 5 exahash and the energized hash rate now is about 2.8 exahash. So we still have 2.1 exahash to be implemented in the first and second quarters. We are waiting for the progress update from our partners. So it's not yet happening, and we believe it will happen in quarter one or quarter two. Just to make sure you understand the same as us.

Okay, NG and James. Thank you for the detail. NG, you mentioned your next generation machine. I'm going to assume it's going to 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 nm now? And when do you think that machine may be available for sale?

Okay, usually we will publish those details when we have the test machine tested and completed. But I think for the machine, we just deployed machines so we aren't selling the chips to our customers. It's very important to know that the performance of a mining machine is not determined by the process node of the chips or the manufacturer of the wafers. To avoid confusion among our customers, we do not emphasize details from our partners. There are many other reasons, but this is the main reason. Our plan is to achieve about a 20% performance improvement every generation. If it's less than 20%, I think it's not very valuable to upgrade to a new generation. So I think that our target is to have at least one generation this year, and if everything is going perfectly, we may have another generation, maybe in Q1 next year or something. Each generation will have improvements around 20%. Our target for the financial side is to ensure that the new generation generates some revenues this year. This is what we aim for, which means we need to put the next generation into mass production as soon as possible.

Thank you, NG. That detail was incredibly helpful and I really appreciate it. Last question from me, probably best for James. Inventory was down about 34% Q-to-Q. I understand that the A13 is now completely out of inventory. I was wondering if you could give us a little insight on the inventory that you are carrying, maybe how much is air-cooled versus liquid-cooled and what your expectations are for that mix in the A14 series?

Yes, Kevin. I think we are in the transition between A13 series to A14 series. I cannot say we have completely cleared the A13 inventory, but luckily A13 can also generate profit for miners after having, in our calculation. The demand is still there, and we can still get a lot of A13 spot sales orders, even in quarter one. So it looks like A13 inventory clearance will last in quarter one and quarter two. It appears A13 has not been completely cleared yet. I think we will ship small batches of A14 in quarter one, like in March, and mass production and shipment will happen in quarter two. We have already received many contract sales orders, like NG mentioned, totaling 7.5 million terahash, and this number is still being updated every day. It looks like customers are still placing orders for A14. So the transition appears better than what I had planned in November. At that time, I thought the A13 series would be very difficult to clear, but the progress seems better than expected. The cash flow tends to be positive, and the operating cash flow seems to be improving in quarter four, which is encouraging. Did I answer your question?

Thanks. I wanted to talk a little bit about the share count. We ended the quarter with 222 million ADS out there. We closed the second tranche for another $49.7 million. Can we get some guidance on the shares outstanding that you expect for the first quarter and second quarter along with your revenues? It looks like with the ATM and the tranches, it's moving up pretty high. Can you just talk about that?

Yes, Michael. I think at the end of last November, we announced we signed a preferred stock sales agreement with a U.S. institutional investor for U.S. $125 million. As of today, we have successfully completed the settlement of U.S. $75 million of the financing. Due to the terms of the preferred stock financing agreement, the closing of the third tranche of preferred shares would be contingent upon mutual agreement between both parties, which means currently we are not going to immediately execute the third tranche. It's a little complicated to specify how big the common shares increased, but you can already see we have increased the common shares, and that reflects in the common shares converted. I don't think we will increase this number in quarter one, but let's see how it goes. The second tranche we have already delivered to the investor. We'll see how they are going to convert the preferred shares to common shares, but currently, we have not received any updates.

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

Yes. From accounting rules, 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 found an independent third party to evaluate the preferred stocks. We also recognized the pre-delivery shares associated with the preferred stock as an ADS lending equity on a fair value basis. The accounting treatment of these three segments of preferred share financing had a certain impact on our bottom line in quarter four, 2023. It's about a $70 million impact. This total includes the first tranche, the second tranche, and also the lending preferred shares, so the lending equity. Putting all this together results in a $70 million impact on our P&L.

Okay, great. And then do you know the average price? You did $61.2 million of your ATM. What was the average price sold?

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.

I have one thing to add. For me and for the company side, after the U.S. $50 million preferred shares settled in January, for at least the next three months, we have enough funds for our operation and expansion. Yes, this is what I want to say.

Thank you, Michael.

Thank you.

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.

I think I'll 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.

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