Canaan Inc. (NASDAQ:CAN) Q2 2023 Earnings Call Transcript

Canaan Inc. (NASDAQ:CAN) Q2 2023 Earnings Call Transcript August 29, 2023

Operator: Ladies and gentlemen, thank you for standing by and welcome to Canaan Inc.’s Second Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the management’s prepared remarks, we will have a question-and-answer session. Please note that this event is being recorded. Now I’d like to hand the conference over to your speaker host today, Mr. Clark Soucy, Investor Relations Director of the company. Please go ahead, Clark.

Clark Soucy: Thank you. Hello, everyone, and welcome to our earnings conference call. The company’s financial and operating results for the second quarter were released by our newswire services earlier today and are currently available online. Joining us today are our Chairman and CEO, Mr. Nangeng Zhang, and our CFO, Mr. James Jin Cheng. In addition, Mr. Leo Wang, IR Senior Director and 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.

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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 thereof and the company assumes no obligation to revise any forward-looking statements that may be made in today’s press release, call or webcast except as required by law. These statements do not guarantee future performance and are subject to risks, uncertainties and assumptions. Please refer to the press release and the risk factors and documents we file with the Securities and Exchange Commission, including our most recent annual report on Form 20-F for information on risks, 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.

Nangeng Zhang: Hello, everyone. This is NG, the CEO of Canaan. Thank you for joining our conference call. James and I are at the company’s headquarters in Singapore and to share our quarterly results with you. During the second quarter of 2023, the price of Bitcoin remained at around $28,000 to $30,000 US dollars at both the beginning and the end of the quarter. However, for most of the quarter, it experienced a downward trend, while the overall network cash rate continued to steadily increase by about 15%. The rise in mining difficulty coupled with sluggish Bitcoin price did have certain adverse impact on both over mining profitability and at our willingness to make purchases. With the industry’s inventory level remaining relatively high, the highly approaching and the pressure of product updates all mining machine providers are eager to clear their inventory.

As a result, the competition in the mining machine market has intensified and the price of computing power continues to be under pressure. In summary, the mining machine market remains in a bear market. Given this situation, our efforts are twofold. On the other — one hand, we are dedicated to upholding our financial resilience and ensuring stable operations. On the other hand, we are also actively allocating resources towards future growth opportunities. I would like to take this opportunity to discuss several strategic points that we are focusing on. First, we are committed to long term investments in R&D and the production capacity to continuously upgrade and integrate our products. As we mentioned earlier, our A13 Series products achieved stable supply and again customer recognition for their performance, leading to a record increase in shipment volume in the first quarter of this year.

During the second quarter, computing power cells of A13 series significantly surpassed that of the A12 series. We are constantly investing in R&D to enhance product computing power, increase power efficiency, and reduce costs. In the first half of this year, our products reached a power efficiency of 25 to 30 joules per terahash. In the second half of the year, we will further optimize the power efficiency range of new products to 20 to 25 joules per terahash, fulfilling our [bulk carrier’s] (ph) commitments. Currently, these iterative products are in the machine debugging and the small-scale trial production stages. And we have started to take customer preorders, even in the current challenging market environment, continuously invest in R&D as supply chain is prudent for us long term divestment.

Furthermore, in alignment with our planned strategy, we are diversifying our product portfolio beyond mining machines. Following extensive period of R&D and testing, we are about to launch our proprietary integrated [indiscernible] solutions. These solutions will effectively assist miners in rapid deployment and adapt to mining operations in various harsh nature conditions. Our integrated 40-foot and 20-foot air-cooled mining container products and 40-foot liquid cooled Avalon mining container products have completed product development for type testing. They have already received orders and are expected to be delivered to customers in the second half of this year. Second, we continue to develop and refine our sales system to connect and support customers worldwide.

Last quarter, we highlighted our work on building, developing and optimizing our comprehensive international sales system. We engaged with large clients, channels and retail customers to enhance our global reach and more effectively convert customers. This quarter, despite the market still being in bearish phase, our overall sales significantly improved on a quarterly basis. Our total computing power sales reached 6.1 million terahash per second, up 45% sequentially, contributing to product sales revenue about of $57.9 million, with a brief surge in Bitcoin transaction fees in early May, there was a small upturn in the demand of computing power, seizing the opportunity, we responded decisively by rapidly expanding into North American market, engaging key clients such as Cipher and Stronghold.

Specifically, we received a significant order from Cipher mining, resulting in 1.21 million terahash per second of computing power sales. In July, we also secured a 220,000 terahash per second sales order from Stronghold digital mining. This marks a significant milestone in our entry into US market. Meanwhile, in Southeast Asia, our distribution channels are steadily expanding. In the second quarter, $3.9 million of revenues was contributed by contributor sales, this figure further grow in the third quarter. Our online retail store cutting to overseas customers continue to expand its global customer base in the second quarter, reaching customers from Brazil, the UAE, Hungary, Cyprus and Lativia for the first time. It’s worth noting that the world is vast and establishing a global sales system takes time.

We are working diligently, and we’ll share with you further positive updates. Third, we remain committed to our mining strategy and we will continuously explore mining projects. During the second quarter, our mining business successfully initiated several new projects. Through our partnership with the public listed company Stronghold, we have installed the initial batch of 0.4 exahash per second of computing power. Recently, we have reached an agreement with Stronghold to future expand our partnership adding 0.2 exahash per second of computing power, which is expected to be deployed and operational during the third quarter. Since the second quarter, we have also installed small-scale computer power for testing in Ethiopia and Paraguay, marking the first expansion of our mining business into these regions.

Although the total network computing power continuing to rise in the second quarter, our mining operations achieved a remarkable result. This was thanks to our increased uptime and industry events such as BRC-20 which boosted Bitcoin rewards for mining activities. During this quarter, we produced 569 Bitcoins, contributing mining revenue $15.9 million, a sequential growth of 43.3%. As previously announced, our mining business has been affected by recent policy changes in Kazakhstan, leading to the temporary shutdown of approximately 2 exahash per second of installed mining power since early July. Furthermore, due to a default by a partner in US projects, 13 mining machines — 13,000 mining machines that we had already installed along with the remaining computing power to be installed will be affected.

These two incidents are expected to impact the operation of close to 3 exahash per second installed computing power starting in the third quarter. At present, we are actively working with local partners in Kazakhstan to apply for the relevant licenses and adjusting our collaborative approach to resume regular operations at the mining site. At the same time, we are working diligently to address the default issue with the partners in US project through legal means, safeguarding the rights and interests for the company and our investors. It’s important to note that we believe active global business expansion intermittently comes with various difficulties and challenges and setbacks are a normal part of this journey. The key point is that our fundamental direction remains unchanged.

We continue to leverage our advantages in computing power supply, recently to the upholding mining as a key development strategy. At present, we are taking proactive steps to minimize the losses with also ensuring that the license learned are not even. We are absorbing experience and proceeding consciously, expanding and exploring new mining project opportunities and accommodating high-quality of Bitcoin assets. Finally, we will persevere through challenges, strive to maintain cash flows and ensure sustainable trend operations. At the same time, we will accumulate assets with robust growth potential while strategically allocating resources to be fully prepared for the upcoming bull market following the [indiscernible]. This remains our levering strategies.

Overall, the market environment was weak in the second quarter, yet our operational performance remained positive. However, the continued selling price decline has created a series of material noncash growth and/or provisions, resulting in substantial losses on our financial statement of this quarter. In this challenging market environment, our focus on cash preservation has intensified. During the quarter, we didn’t utilize our ATM facility or conduct financing activities. Our cash flow level experienced only a slightly sequential decline and was prudently managed overall. As we move further into the second half of 2023, US interest rate hikes have not come to a complete stop and the global economic outlook remains increasingly uncertain. Amidst this uncertainty, unforeseen events still have the potential to cause significant fluctuations in the Bitcoin price.

We believe that the broader market lacks sufficient upward momentum. In addition, large scale miners financing capabilities remain constrained. The recent hash rate growth curve also indicates a notable decline in the overall industry’s incremental hash rate investment and deployment during the first three quarters of this year. This trend aligns with our market assessment. Furthermore, policy changes concerning crypto-currencies and mining in various countries introduced further uncertainty to both the industry and our operations. In some cases, these changes could present unforeseen challenged to our actual operations. Given all the factors I have just outlined, we have a highly cautious outlook for the third quarter of 2023. We expect that revenues from the — for the quarter will be approximately $30 million.

This forecast reflects our current views on the market and operational conditions and actually results may be subject to change. Overall, as you might already be aware, we have navigated several Bitcoin cycles since our inception in 2013. Our task is to confront and resolve the challenges we encounter. Much like Bitcoin itself, where every day we create new history with each new day, we become more experienced and stronger than the day before. We remain fully committed to performing ahead of the market curve. Next month, on September 12, we plan to celebrate the company’s 10th anniversary in Singapore. Canaan stands out industry [voting] (ph) and proudly holds the distinction of being the first NASDAQ listed company in our industry. Over the past decade, our evolution from a project group into a multinational company with leading chief design capabilities has been remarkable.

As we step into the next decade of development, Canaan potential achievements in the coming decade are exciting to consider. This concludes my prepared remarks. Thank you, everyone. I will now turn the call over to our CFO, James. Thank you.

James Jin Cheng: Thank you, NG, and good day, everyone. This is James speaking at our Singapore headquarters. As NG started the call with, I would like to say the second quarter of 2023 was still a very dynamic bear market period for the Bitcoin mining machine industry with a complicated range of influences and mixed factors. First, as we observed in this period of interest rate hikes, there was no significant upside for the price of Bitcoin in quarter two. The Bitcoin price settled into a range between $28,000 to $30,000 compared to the rapid growth from $16,500 to $28,500 in quarter one. Secondly, in May, there was the BRC-20 incident helping miners enjoy higher transaction fees, signaling the possibility of increased future mining revenue from these fees.

Thirdly, the total Bitcoin hash rate continued to climb, increasing by 15% over the quarter. Total demand for mining machines increased compared to quarter one. Moreover, we observed intensified competition among mining machine manufacturers. Inventory levels remained high and selling prices continued to decline in quarter two compared to quarter one. All the above factors should be considered when analyzing our Q2 numbers. Of course, we also did our best to deliver the numbers and keep our operation resilient. Let’s start with profit and loss. Overall speaking in quarter two, total revenue generated was $73.9 million, which beat our guidance of $72 million and represents an increase of 33.7% quarter-over-quarter. Additionally, our mining revenue reached a record high of $15.9 million and contributed more than 20% to our total revenue in this quarter.

Regarding our machine sales, our revenue from mining machine sales was $57.8 million in this quarter, 32.2% higher than $43.7 million in the last quarter. We delivered a total computing power sold of 6.1 million terahash per second, representing a sequential growth of 44.2% and a year-over-year growth of 11.7%. However, the average selling price still declined slightly from $10 per terahash per second in quarter two to $9.5 per terahash per second in quarter two, which resulted from fierce competition. Specifically, for our mining machine sales, we accrued $45.9 million for inventories write-down, prepayment write-down and a provision for reserve for inventory purchase commitments in this quarter. The inventory write-down of $17.4 million was recorded based on the most recent subsequent selling price where we offered further price concessions in August.

This inventory write-down decreased by 50% sequentially. Another $28.5 million was mainly a result of one-off inventory write-down and a provision for commitment to reserve for previous generation wafers, which we no longer plan to produce into mining machines. Those write-downs and provisions are made under US GAAP rules, jeopardizing our gross profit and making the quarterly loss figure, 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 $0.4 million and a gross margin of 0.6%. Turning to our mining business. Because of the Bitcoin price recovery and increased Bitcoin rewards driven from BRC-20 across the network during this quarter, our mining revenue reached a record high of $15.9 million, representing a sequential growth of 43.3% and a year-over-year growth of 105.1%.

As of the second quarter’s end, our total deployed hash rate remained at more than 5 exahash per second and our installed hash rates reached more than 4.9x exahash per second. We mined 569 Bitcoins in this quarter and achieved 50.4 Bitcoins points for mining profit. Gross profit margin was 9.5% for our mining business in this quarter. Please note here that mining profit or loss is defined as the proportion of mining revenues deducting cost for energy and hosting in terms of mining revenues without consideration of depreciation. Now let us take a look at the expenses. Our R&D expenses were $17.9 million in this quarter, compared to $19.1 million in the last quarter and $15.6 million in the prior year period. The slight quarter-over-quarter decrease was due to the decreases in materials used for research and development purposes.

The steady year-over-year growth reflected our continuing commitment to building a talented R&D team. Our sales and marketing expenses were $2.4 million, compared to $1.5 million in the last quarter and $3.2 million in the prior year period. Sales commissions increased quarter-over-quarter because of revenue upsizing from quarter one to quarter two. Our general and administrative expenses in this quarter were $26.4 million compared to $17.6 million in the last quarter and $22.1 million in the prior year period. The year-over-year and sequential increases were mainly due to $8.8 million in impairment of property and equipment. As we announced on August 18, we temporarily shut down 2 exahash of our mining computing power in Kazakhstan since July 2023 in order to issue legal compliance and we initiated the dispute resolution process with a partner at a US-based mining project.

These challenges are anticipated to substantially affect our operational mining computing power starting in the third quarter of 2023. Therefore, we recorded $0.6 million and $8.2 million impairment for the related machines deployed in Kazakhstan and the United States, respectively. This is also necessary action under US GAAP hitting profit and loss, while having no immediate impact on Q2 cash status. The net result of the foregoing was an operating loss of $119.1 million for this quarter compared to $85.7 million in the last quarter. The net loss was $110.7 million compared to $84.4 million in the last quarter. The loss included a series of necessary write-downs of inventory, one-off reduction of holding prepayments and PPE impairment totaling $54.7 million.

Turning to our balance sheet. First of all, let us keep eyes on the cash status. We held cash and cash equivalents of $66 million as of June 30, with a $6 million decrease compared to $72 million at the end of March. And in quarter two, we spent $76 million to sustain the wafer supply and machine production. Other cash payments included $21 million for operations and $3 million in tax expenses. The cash-out totaling $100 million was net of by inflows of $93 million from sales and accumulated value-added tax refund for exporting sales. As previously mentioned, I’d like to reemphasize that we’ve recorded a series of material non-cash accruals or provisions in this quarter, including inventory write-down, one-off provision for commitment reserve and PPE impairment.

These non-cash accounting treatments were based on US GAAP requirements and resulted in expanded current losses. However, these non-cash accruals and provisions did not materially influence our cash flow. As of the end of this quarter, we recorded account receivable of $10.1 million. In order to strengthen collaborations with key clients, we have implemented an installment policy for certain key account customers who meet certain conditions, resulting in account receivable at the end of this quarter. In the future, we will continuously evaluate market demand and customer credit prudently and adopt corresponding credit policies. Now turning our attention to our Bitcoin assets. We held 747 Bitcoins as our own holding assets as of June 30, which is 124 more than 623 at the end of March 31.

For the first half, we also held 378 Bitcoins received as customer deposits, which is new to our balance sheet. From May 25, 2023, the date we reported our financial results for the first quarter of 2023 to August 29, 2023, we neither utilized the ATM not purchased any ADS. In the future, we will prioritize shareholders’ value, carefully monitor cash flows and stock prices and flexibly execute any potential ATM sales or stock repurchases. In quarter three, we anticipate a revenue of $30 million. In the second half of 2023, the price of Bitcoin is still facing a challenging environment and the price competition remains intense. Policy changes regarding crypto currencies and mining in different countries will also add uncertainties to industry operations.

We will face unforeseen obstacles. Based on the above comprehensive situation, we give a cautious expectation for the third quarter of 2023. Now I would like to briefly walk you through our financial results for the quarter. Revenues in the second quarter of 2023 was $73.9 million as compared to $55.2 million in the first quarter of 2023 and $245.9 million in the same period of 2022. Gross loss in the second quarter of 2023 was $70.1 million compared to a gross loss of $47.5 million in the first quarter of 2023 and a gross profit of $138.3 million in the same period of 2022. Total operating expenses in the second quarter of 2023 were $49.0 million compared to $38.1 million in the first quarter of 2023 and $45.4 million in the same period of 2022.

Loss from operations in the second quarter of 2023 was $119.1 million, compared to a loss from operations of $85.7 million in the first quarter of 2023 and an income from operations of $93.0 million in the same period of 2022. Net loss in the second quarter of 2023 was $110.7 million, compared to a net loss of $84.4 million in the first quarter of 2023 and a net income of $90.1 million in the same period of 2022. Basic and diluted net loss per ADS in the second quarter of 2023 were $0.65. As of June 30, 2023, the company had cash and cash equivalents of $66.1 million. This concludes our prepared remarks. We are now open for questions.

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Q&A Session

Operator: We will now begin the question-and-answer session. As a courtesy to other investors and analysts who may wish to ask a question, please limit yourself to three questions at a time. If you have any follow-up questions after the Q&A session, the Investor Relations team will be available after the call. For the benefit of all participants on today’s call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. [Operator Instructions] Thank you. We will now take our first question. And your first question today comes from the line of Mike Legg from The Benchmark Company. Please go ahead.

Mike Legg: Thanks. Good morning. I’m curious about your focus on rig efficiency and how you view your product versus the competition, specifically versus what’s miners and ex-miners and then also wanted to understand your viewpoint on self-mining versus hosted environments given the release last week. Thanks.

Nangeng Zhang: Hi, good evening, or good morning. Yeah, for the — in terms of the power efficiency, I think it’s a critical factor for customers. In the first half of this year, our products have already entered a range of 25 to 30 joules per terahash. This is a significant improvement compared to last year. And by the second half of this year, the power efficiency of the products were simple for customers is already below 35 joules. This fulfilled our commitment. The progress in our products, our efficiency improvement is on track and as planned. We are gradually narrowing the gap with our main competitors. Yeah. And I think the R&D and switch, the progress takes some time. But yeah, we are closing. So I think beyond that, I mean, beyond the power efficiency number, our products are balanced in terms of stability, environmental adaptability and cost effectiveness.

And our production — product line is diverse. So the miners — I think the miners return on investment and profitability are influenced by both OpEx and CapEx and our goal is to have an advantage in both of these indictors, making our products is preferred — is a preferred choice for customers. Yeah. About the self-mining. Regarding the policy environment, Kazakhstan has issued a new regulatory process related to mining. Since the detailed revolutions came into effect in early July, the company immediately issued applications for licenses. However, in the actual process, we found that due to the early stage of the entire regulatory process, their specific requirements in execution, which leads to the license application is taking longer than initially anticipated.

For instance, we learned through particular operations that we need to wait for our mining partners to obtain a Type 1 license before we can submit applications for Type 2 license. As far as we know, the progress of obtaining Type 1 license for local mining facilities are generally being slow. It seems that the cost execution for new regulations, it’s still in the early stages. The specific execution procedures will take time to ramp up and will impact the process for resuming our local mining projects. The company and our local mining partners are actively progressing with required license applications. We are also exploring various ways to adjust our cooperation agreement to continue working with local miners in compliance with laws and regulations.

Furthermore, we are exploring more valuable mining cooperation opportunities globally. Our business has reached many geographic regions where we haven’t set foot before. The political and economic environments, legal policies and infrastructure conditions in different places are complex and subject to change, which presents challenges to our explanation and development, where there is business, there’s associated risk. We closely monitor policy and operational environment changes in the countries and regions of our projects and make operational adjustments as necessary. As a public company, we will also announce important developments in time for investors references. Regarding to the counterparty risk, we acknowledged that in any business market, there may be someone who do not act in good faith.

We are resolutely addressing issues encountered in projects through legal measures. At the same time, we are learning lessons from experience, being more cautious in selecting partners, taking preventive measures, balancing risk and the rewards and progressing projects conservatively. Thank you.

Mike Legg: Thank you very much.

Operator: Thank you. We will now take our next question. Please stand by. This is from the line of Kevin Dede from H.C. Wainwright. Please go ahead.

Kevin Dede: Hello, gentlemen. Thank you so much for taking my questions. NG, you spoke a little bit to inventory. I think, so did James. Inventory levels worldwide. Could you give us a little more color on what you’re seeing. Clearly, there’s lots of pressure on pricing. But I was wondering if you could compare global inventory levels with the end of March. Do you think they’re still high? Do you think they’ve come down a little bit? Clearly, you’re seeing — you’ve sold more of the A13 series. So congratulations on that. I’m just kind of curious about future price per terahash trends.

Nangeng Zhang: Hey, thank you. Good morning. I think in the past few months, the mining machine market’s main focus has been on product upgrades and clearing inventory. So as a result of the overall market entry has aggressively decreased. However, it’s important to note the market inventory still remain at relatively high levels. Taking a global view of the market, I think with the gradual recovery Bitcoin price this year, both the company and some clients worldwide have been provisioning themselves ahead of the next [indiscernible]. However, it is crucial to understand that the private market sentiment is somewhat fragile and policy exchanges and reform price fluctuations. So due to the competitive reasons, we cannot disclose specific client improvement plans.

But the overall trend in the second half of the year is clear. High-quality expansion minded clients will prepare for the next four years, after having by preceding related to machines. [indiscernible] While many small and medium-sized miners, will operation for cost-effective traditional models to expand short-term gain with a lower rate. So due to the current instance competition in the mining machine market, computing power price is generally at a minimum profit or even negative margin levels. So I think from the prospective money machine prices, the current [indiscernible] pushing in mining machines, offering great value. We hope that the customers who are still considering their purchase platform will face orders as soon as possible. Yeah, thank you.

Kevin Dede: So NG, you also spoke to maybe Holding back on your wafer orders from your foundry suppliers. I’m curious on how you see being able to resume those orders if and when the mining machine market returns to strength. Are you at all concerned that you will not be able to get wafers that you need to build new inventory? How concerned are you about your supply chain?

Nangeng Zhang: Let me see. I think currently, we are building the machines from when we have — when we started the contract with our customers. Recently, I think that the semiconductor foundries have relatively ample production competitive. So with a good wafer price. However, in order since wafer for advanced process nodes have a higher cost due to the high technology and lower supply. So, yeah, so I think for the next maybe two quarters, the supply chain is not the primary problem for us. Our — we will focus on the — our sales system and provide machines with best performance in the market, continue to invest in our R&D, yeah.

Kevin Dede: Okay. Last question for me, NG. Understand maybe 2 exahash not running in Kazakhstan and perhaps 2 exahash not running in the US, given about 5 exahash installed, can you talk to what you expect your self-mining hash rate to be through the September quarter and what your investment thinking is regarding Canaan self-hash rate for the balance of the year?

Nangeng Zhang: For the numbers, I will pass this question to James.

James Jin Cheng: Yeah. Kevin, this is James. We are talking about total of 4.9 exahash of mining power. And the loss from Kazakhstan is about 2 exahash as you said. But the loss from US is only 1 exahash, it’s not 2. So the total loss for here is 3 exahash compared to the total 4.9 exahash and also in quarter two, we have already successfully deployed 0.4 exahash with Stronghold in the United States. And we have another 0.2 exahash to collaborate with Stronghold as well as in the United States. And also in quarter three, we start to — brought some pilot runs in the new cooperative sites in Africa, South America and North America. But of course, get electricity is a slow progress, it will take some time. So in my estimation about quarter three, we definitely will lose half — at least half of our total capacity if the Kazakhstan machines could not recover quickly.

So that’s also reflected in our total revenue estimation about quarter three. But we are looking for different sites in different locations, so we can recover this quickly in quarter four. So from my estimation, in quarter four, we will have a bigger chance to recover the mining operation hash rate and we will continue to take mining as one of our important strategies and execute the strategies consistently. Thank you, Kevin.

Kevin Dede: Well, thank you, James. I really appreciate it. Thank you for chiming in and thank you so much, NG, for offering additional color. Thanks, gentlemen.

Operator: Thank you. We’ll now take our next question. This is from the line of Shuang Zhang from Guosen Securities. Please go ahead.

Shuang Zhang: [Technical Difficulty]

Operator: This is the operator. Shuang Zhang, your line is not too clear. Could you please try asking your question again?

Shuang Zhang: Okay. My first question is, when do you expect to clear out the A12 inventory?

James Jin Cheng: Thank you, Shuang. I think we are actively working on clearing the inventory of A12 models. And the progress has been a little bit slower than we anticipated. At this point, we expect to complete the clearance by the fourth quarter of this year for A12 series. Thank you.

Shuang Zhang: My second question is, how was your progress on mining cash rate deployment and installment? [Foreign Language].

James Jin Cheng: Yeah. As just now I referred to Kevin, we have lost the 3 exahashes in Kazakhstan and also one site in United States. We quickly installed another 0.4 exahashes during quarter two with Stronghold, one of our important mining partners in the United States. And we implemented another 0.2 exahashes in quarter three with Stronghold. And also, we deployed some new sites in Africa, South America and North America during quarter three with pilot runs. Those small sites together, I don’t think we can recover 100% of the total hash rate back to 4.9 exahash at quarter two. That means we definitely will lose some of our capacity in quarter three, but we will step by step recover that in quarter four with all the new sites ready and we have the shipment scheduled to make our total capacity come back to the bigger ones.

So I think to your question, I will still consistently say we put mining as our important strategy, and we will consistently invest and deploy machines to support that strategy. Thank you. Thank you, Shuang.

Shuang Zhang: Thank you. And the last question is, how do you expect the upcoming events impact computing power demand and price? [Technical Difficulty]

Nangeng Zhang: Okay. Okay. Good evening. As previously mentioned, we observed two trends in the past half year. On one hand, our high quality and expansion minded customers opting to procure the latest machines models through futures contracts. On the other hand, a significant number of more to medium-sized miners are hedging the having risk by purchasing older models at lower prices. So in general, the market demand is recovering this fluctuation. However, due to the reactively high market inventory and intense competition, the mining sector will continue to experience pressure on computing power prices. Yeah, thank you.

Shuang Zhang: Okay. Thanks for answer.

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

Clark Soucy: Hi, everyone. This is Clark. Thank you so much again for joining us today. If you have any further questions, please feel free to reach out to us to the contact information provided on our website, and have a nice day.

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