Canaan Inc. (NASDAQ:CAN) Q1 2024 Earnings Call Transcript

Canaan Inc. (NASDAQ:CAN) Q1 2024 Earnings Call Transcript May 17, 2024

Canaan Inc. beats earnings expectations. Reported EPS is $-0.16, expectations were $-0.6.

Operator: Ladies and gentlemen, thank you for standing by and welcome to Canaan Inc.’s First Quarter of 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. After the managements’ prepared remarks, we will have a question-and-answer session. Please note that this event is being recorded. 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 first quarter 2024 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, Head of Capital Markets, 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 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. 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 filed 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 their set forth into 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’s website. And with that I’ll turn the call over to our Chairman and CEO, Mr. Nangeng Zhang. Please go ahead, sir.

Nangeng Zhang: Hello everyone, this is NG, CEO of Canaan. Thank you for joining our conference call. Our CFO James and I are at the company’s headquarters in Singapore to share our quarter results with you. The first quarter of 2024 was the last quarter before Bitcoin’s post-halving. 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 tried to maintain the stable operation of existing computing power to maximize the remaining value of their equipment.

Therefore, transactions during this period are generally very flat. The only variable was a rapid fluctuation in Bitcoin price during this quarter, reaching a historical high of $33,000. We see this opportunity to make maximum efforts in sales activities, selling a total computing power of 3.4 million terahash per second and achieving a total revenue of $35 million, surpassing previous expectations. At the same time, anticipating a market recovery will continue to proactively prepare [US expects] (ph), including the mass production of new products and the R&D integration of next-generation products. Striving to improve mining operations and computing power deployment, we maintain the close cooperation with our foundry partners on the supply side, laying out capacity in advance for the bull market.

Our efforts have yielded positive results. Now let me share with you one by one. In terms of research and development, we are delighted to announce that we officially launched our company’s new generation of mining machines, the A15 series, as Bitcoin Asia 2024 in Hong Kong on May 9th. The A15 series adopts more than one designs and process knowledge, 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 185 terahash per second and energy efficiency better than 18.5 joules per terahash. The machine operated very stably, demonstrating excellent performance. We believe that the A15 series will become a more competitive product choice in the post-halving computing power market.

Meanwhile, this quarter our A14 products have entered mass production and delivery. Through close collaboration with foundry partners, we have completed the capacity ramp ups and yield rate improvements this quarter. As we enter the second quarter, the A14 series products have begun concentrated delivery and will transition to support sales in the third quarter. We will continue to manage the pace of [capacity locking] (ph), invest capital into mass production, and meet older delivery needs. Additionally, the R&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 Avalon Nano 3 Mining Heater, this product with its possible and lightweight design and various colors, received active contract orders from consumer market since its launch.

We continue to provide the 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 service quality. In terms of mining machine sales, this quarter we delivered 3.4 million terahash per second of computing power, reflecting the wait-and-see attitude towards purchasing [spot] (ph) mining machine before the halving. Additionally, as we transition through product iterations. We have completed the first batch delivery of our A14 presale orders in the fourth quarter and are now accelerating mass production deliveries. Since the pre-sale launch of A14 product in late 2023, it has continued to be popular by the end of the first quarter.

Customer advances primarily driven by A14 products amounted to about $39 million, nearly double the $19.6 million at the end of 2023. After the successful completion of halving in the second quarter, we have seen a significant increase in purchasing inquiries and expect to receive more customer advances. Our A15 series products made their official debut at Bitcoin Asia 2024 in Hong Kong on May 9th. And within three days after the summit on May 12th, we signed MOUs and received earliest deposits from 26 customers, which we are currently following up on forming contract sales. Over the past few years, the company has established [presales] (ph) coverage in markets with energy cost advantages. After the halving, 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 A13 spot inventory and expect to complete the transaction of mainstream products for sales in the third quarter of this year. Additionally, in North America, where institutional miners are concentrated, we are working to enhance brand and product recognition. Besides various cooperation with public traded companies such as Cipher and Stronghold, this quarter we also signed an agreement with Marathon Digital for the first time, at the Bitcoin industry conference in Dubai and Hong Kong this year, we actively discussed cooperation opportunities within institutional and distributor customers. In Southeast Asia, distributor customers generate sales revenue of $5.7 million for the 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, Avalon Nano 3, which has attracted active orders from individual [e-services] (ph) and current orders of near 10,000 units. Occasionally selling out. The company’s comprehensive mining solutions also received more orders this quarter. By the end of the first quarter, our mining business installed a computing power increased to 3.8 Exahash as 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 cooperation 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 $10 million 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 1,057 bitcoins with a current market value of over $65 million. We will continue to carefully balance policy, stability and [location-know] (ph) advantages of energy costs and persist in cultivating our mining business. Since the first quarter, the company has continued to improve as overall operational level by pushing forward and adopting flexible sales and sales strategies.

We have made good progress in clearing out inventory, significantly reducing the inventory levels on the balance sheet. We’re 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 bitcoin held by the company increased, this portion of cryptocurrency 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. On the expense side, the organizations – [optimizations] (ph) made previously showed further positive effects in the first quarter.

Despite 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 first quarter, apart from the previously disclosed $50 million settlement of preferred stock, the company has not engaged in any other financing activities, including ATM offerings. In-line with routine practice for US-listed companies, 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 second and third quarter of 2024, our A14 mining machines have successfully passed through the stages of transition to mass production, capacity ramp-up and yield rate improvement, entering the phase of accelerated buck delivery.

Regarding our mining operations, post-halving, we are evaluating and adjusting our existing mining projects. Recently, especially after the official launch of new product A1566 product, there has been a significant increase inquiries for mining machine sales. And we have already received several earnest deposits. Now we are swiftly advancing the shipment for Proco machines, aiming to convert these intentional orders into actual sales contracts as quickly as possible. Based on my personal experience in the weeks following the halving, miners will gradually start their computing power purchases preparing for the new full year cycle. This process will also initially reflect in volumes and our supply and the dynamic shift, computing power prices 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 is 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 second and third quarters of 2024. For the second quarter of 2024, the company expects total revenue to be approximately $70 million. For the third quarter of 2024, the company expects total revenue to be approximately $70 million. This forecast is based on the current market and operational conditions of the company and actual results may vary. Overall, the period leading up to the 2024 bitcoin halving, including the entire first quarter for the super wait-and-see season for the mining machine market.

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 US SEC. And by the end of April, the Hong Kong Stock Exchange approved the listing of multiple cryptocurrencies for ETFs. These milestone events will further encourage traditional finance to participates in bitcoin’s development. By the end of the first quarter, 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 [fourth-halving] (ph) schedule, starting a new four-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 indicates a broader potential of industry growth.

Looking at the underlying operation of Bitcoin trading system, which the smooth completion of 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. 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. At the company’s A14 products are being delivered successfully and the new A15 series products have debuted and opened for pre-sales. And our one-stop comprehensive mining solutions and Avalon Nano 3 products are being brought to market.

They are aggressively gaining recognition for more customers. On the product side, the company is addressing to the world’s needs of different customers with a richer and more efficient selection of products. At the same time, we continue to lock in production capacity on the supply side with advanced process and comprehensively reach customers at a 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 of hash rate, continuously supporting the bitcoin network with our computing power and creating long-term value for our shareholders. This concludes my prepared remarks. Thank you, everyone. I will now turn the call over to our CFO James.

Thank you.

James Cheng : Thank you, NG, and good day, everyone. This is James speaking at our Singapore headquarters. As NG started at the top of the call, this quarter was a super wait-and-see period that occurs every four years, as the last complete quarter before the halving event of this point. Despite the subdued market, we continue to execute our strategy. First, we were committed to wafer capacity investments and R&D activities of new generation machines. This allowed us to 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 the flexible and multichannel sales strategy to enable us to accelerate destocking of existing products and accumulate contract sales orders for A14 series.

Thirdly, we adhered to our own mining strategy, continued 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. Q1 total revenue was $35 million, which beat our guidance by $2 million or 6%. Our revenue from machine sales was $23 million, and our mining revenue was $10 million. Regarding our machine sales, we delivered a total computing power sold of 3.4 million 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 for to $6.9 per terahash per second in quarter one, coupled with the multiple factors, including before halving the New Year and the Lunar New Year.

The market demand in this quarter was quite weak, and we could only sell current inventory of older generation products. 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 $5.7 million to our total quarter one revenue, representing a 27% sequential growth. We continue 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 the revenue of our integrated mining solutions, which diversified our product revenue streams.

In quarter one, we received the customer payments of $4.9 million from purchase orders for our integrated mining solutions. These orders are gradually delivered, therefore $0.2 million was recognized in quarter one revenue, the remaining $4.7 million will be delivered in quarter two and contribute to our quarter two revenue. Specifically, for our mining machine sales, we accrued $47.5 million for inventories write-down, prepayment write-down and a provision for inventory purchase commitments in this quarter, representing a 14% decrease sequentially. The decrease was driven by accelerated de-stocking in this quarter. Those non-cash write-downs and provisions are made under US 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. 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 one increased 47% over the last quarter from almost $37,000 to almost $54,000. Our energized computing power in Kazakhstan recovered to 1.1 exahash in quarter one. We also further expanded our mining business in Africa, increasing our energized hash rate to 0.9 exahash. At the end of quarter one, our energized hash rate totaled 3.0 exahash per second, increasing 58% over the last quarter.

Our mining profit was 121 bitcoins, which increased 250% compared to the last quarter. Gross profit doubled quarter-over-quarter to $3.5 million for our mining business. Please note here that mining profit or loss is defined as money revenues net of costs for energy and hosting, but without consideration of depreciation for the deployed machines. Now turning to expenses. Our operating expenses totaled $31 million, 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 four last year. As the bitcoin price rose, no further impairment for our self-mining machine was accrued in this quarter, which reduced the operating expenses by $6 million compared to the last quarter.

I want to point out that we chose to early adopt the FASB new accounting rules on cryptocurrency assets since January 1, 2024, which allow crypto currencies to be carried at their fair market value. According to these accounting rules, the cumulative effect of $19 million was recorded to the opening balance of our retained earnings. As the bitcoin price increased from $42,000 on January 1, 2024 to $70,000 on March 31, 2024 again on fair value change of $33 million was recognized in our quarter one profit and loss. As the second tranche of preferred shares was issued in January, we recognized the remaining unconverted preferred shares as liabilities and recorded a non-cash gain on fair value of $2 million according to US accounting rules compared to a non-cash loss of $10.9 million in quarter four.

Benefiting from the narrowed gross loss, the lower expenses and the gain from the fair value change of cryptocurrency and the financial instruments, quarter one net loss was $39 million, narrowing 72% quarter-over-quarter and 53% year-over-year. Turning to our balance sheet and cash flow. In quarter one, we generated $48 million of cash inflows from sales received $50 million from preferred shares financing facilities and $10 million from export VAT refunds. We paid $88 million to secure our wafer supply and $61 million for production and operation. Our increasing investment in wafer supply is aimed at enabling the concentrated delivery and spot sales of our A14 series product in the following quarters. Consequently, at the end of quarter one, we held cash and cash equivalents of $55 million on our balance sheet.

Now moving on to our contract liability. Our A14 series has continued to be popular since the presale beginning in late 2023. The balance of contract advances reached $39 million as of this quarter end, nearly doubled from $19.5 million at the end of the last quarter. As of the end of quarter one, we recorded account receivable of $1.6 million a decrease of 45% compared to the last year end. We will continuously evaluate market demand and adopt corresponding credit policies with caution. Now turning our attention to our bitcoin assets. The bitcoin we held as our own holding assets kept growing in this quarter and reached a record high of 1,057 bitcoins as of March 31 which is 148 more than the 9,009 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 million. Combined our balance of cash and owned bitcoins demonstrated approximately $130 million of liquidity. Turning to our fund raising. In early January 2024, we closed the second tranche of our preferred share financing, raising total net proceeds of $49.9 million. This has been reported in the previous quarterly release. After that, we have not done any fundraising. We expect our quarter two revenues to be $70 million and quarter three revenues to be $70 million, respectively. We are glad to see that our A14 products are being successfully delivered. The new A15 series products have debuted and opened for pre-sales and our one-stop comprehensive mining solutions and Avalon Nano 3 products are gaining recognition from more customers.

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.

Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Kevin Dede from H.C. Wainwright. Please ask your question.

Kevin Dede: Hi James — and NG and James, thank you very much for having me on the call. Can you hear me okay?

Nangeng Zhang: Yes, Kevin.

Kevin Dede: Great. Okay. So NG, right off the bat, I’m going to apologize because my first question is long and a little convoluted. But I think, you will understand where I’m going, and I know you gave me a great answer. So I’m wondering how these — all these factors combined together, number one, we have the many Canaan new products coming to market. We have the A14, we have the A15 coming soon and the A16 in R&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.

Nangeng Zhang: Good morning Kevin. For — I think in the terms of our major product series, we are still in the cycle of iterating generations roughly every three quarters. This pattern also applies to our next-generation product. I think, this is beneficial for both customer choices and hash rate deployment planning, because you have a quite clear prediction of new product. And in terms of power efficiency, our mainstream products released last year have entered the range of 20 to 25 joules per hash. And with the products first half of this year are in the 15 to 20 joules per terahash range. And I believe the next target for the industry will be in the 10 to 15 joules per hash later this year or early next year. These R&D efforts are progressing systematically.

Yes. So also, I want to mention, apart from the chief development, we are actually accelerating in the chip to machines to mass production stages. I have examples here, A15 batch – as an example, 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 will showcase in public events like exhibitions. And yes, for today, we are in the process of sending fresh proto 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 ‎Avalon Box containers, even the consumer Avalon Nano 3 products. Yes, so I think this — we will give you some guidance for the — what will happen in the next like 18 months or two years.

Kevin Dede: Okay, thanks NG. 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? Are — would you consider selling them at some point in order to raise capital in order to fund your business. I understand the $88 million deferred or wafer run. That’s a lot of money. So I’m just kind of wondering how you’re thinking about that.

Nangeng Zhang: I think for the Bitcoin we [indiscernible] holding, 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 sales, we will hold most of them. I mean we will close 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. I think maybe James can have some ideas on this.

James Cheng: Yes. Currently, we are starting on different approaches as using bitcoin as collateral and also can generate new financing interest either in bitcoins or in other cryptocurrencies like USDT. So we are talking to different vendors to see the possibility and the potential to generate more cash flows and the 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. Thank you Kevin.

Kevin Dede: Last question for me. Just curious about your perspective on the competitive environment. Obviously, Jihan Wu is back in the market a bit there. The Aerodyne machines are expected to come out this year. I appreciate your perspective on Canaan’s revenue. You’re obviously a pretty bright outlook. I’m just wondering how you see that competitive environment shaking up?

Nangeng Zhang: Thank you, Kevin. Yes, we have also noticed some new entries in the market recently. Some have announced that their designs are in the tape-out space, where others have shared results from like chip testing. However, I think the results expectation, we have not seen the [bug] (ph) machine deliveries in the open market yet. So once machines are actually delivered to the market, we will conduct thorough research. However, we cannot comment on products that have not been delivered. I think the entry of new players indicate that the bull market for mining machines is approaching. It’s mainly seeing the industry prospects and choosing to invest and enter the market. At the same time, this phenomenal also suggests that the industry, including ourself, eventually have errors that not fully satisfy our market partners or our customers in terms of like products, pricing, customer service, customization and sales coverage.

I think this led us to accelerate progress and improvement. The entry of these new players clearly brings more vitality 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 back — just at the beginning of the journey of hardships towards growing into an excellent brand and road ahead is indeed a lot. It has been 11 years since ideally were the – world’s first AC bitcoin mining machines to customers. And although we have accumulated a lot of experience over time. My respect for this industry has only grown. 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 mining machine providers, we must continuously to serve our customers, especially during industry downturns which is not easy. I have endured several past cycles, only a few including us have persisted, and we are the only one among with others that is publicly listed-company. Sorry, for a little bit long. Thank you.

Kevin Dede: Thank you very much gentlemen. Appreciate you, taking the time to answer my questions. And thanks for having me the call.

Nangeng Zhang: Thank you Kevin.

James Cheng: Thank you.

Operator: Thank you Kevin. Our next question comes from the line of Shuang Sun from Guosheng Securities. Please ask your question Sun.

Shuang Sun: [Foreign Language] Please share more color on A1566 product.

Nangeng Zhang: You mean the performance or –.

Shuang Sun: Yes.

Nangeng Zhang: Yes. For — yes, I think we have already demonstrated our A15 series. The model is A1566 in the Hong Kong event. And with an average computing power of 185 terahash per second and power efficiency of better than 18.5 joules per hash. I think this performance is on par with competing products currently on the market. Yes. And — so I think at this stage, we are preparing the [proco] (ph) 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 is really a long production period due to the cutting-edge technology. So it’s still some months away.

Shuang Sun: [Foreign Language] Please share your review of the continuity of the company’s operations.

James Cheng: Thank you, Sun. 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 million cash on hand and also we have another 1,057 bitcoin as of today, it equals like $65 million. Putting this together, we have the liquidity — total liquidity like $120 million together. And in quarter one, our expense together is about $31 million, which including like one-third of the expense is non-cash expense. So actually the cash expense for routine business is like $20 million per quarter. So $120 million compared to the $20 million spending. So that means another six quarters to go if we don’t do anything. But of course, we are doing preparations for bull market.

We have to be very careful about the cash management. I think currently, we have already seeing 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 two and quarter three, as we predicted the revenue will be higher. And also, most of the credit customers has already completed the payments for their orders, and our account receivables have decreased sequentially. The sales cash inflows I think has already been shown 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 of pace and unlocking proportion of cash in two month production that’s something we have to do.

That’s why in quarter one, our cash payment to lock the wafer is about $88 million. So it’s a lot. So putting this together, while we maintain our sales level of cash reserves, while we have the more than 1,000 coins, we have a substantial potential liquidity safeguard on hand. Looking to me, it is 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. Thank you for the question, Shuang.

Shuang Sun: [Foreign Language] Please share your view on the timing of return profitability this year.

James Cheng: Yes. I think profitability is always the question from investors. People would like to see the bear market end and to see our profit coming back as the bull market. I think the most interesting thing in our industry is the average selling price. I think that we can see our past three 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.

With this kind of condition, under such cases given the limited supply capacity of the advanced process using in our mining machines. I think that 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.

Our current assessment is that losses — loss could continue through the first two or three quarters of 2024. But there is a big potential opportunity for gross margin to turn positive or even significantly improve in the third and fourth quarter, especially the fourth 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 one year time. Step by step, we will be there. Thank you, Shuang.

Shuang Sun: [Foreign Language] You still have financing plan going forward.

James Cheng: I think after A14 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 cash flow operations and the balance sheet are also improving. So I think as just mentioned, we have already did the financing in quarter four and quarter one of 2024, with the total cash like $136 million. We do not have any urgent equity financing plans in the near-term. So I think that’s a clear answer. We do not have urgent equity financing plans in the near-term. Thank you Shuang.

Shuang Sun: [Foreign Language]

Operator: As there are no further questions now, I’d like to turn the call back to the company for any closing remarks.

James Cheng: 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.