Ladies and gentlemen, thank you for standing by and welcome to Canaan Inc.'s Second Quarter 2024 Earnings Conference Call. At this time, all participants are in the 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, Ms. [Gwen Lauber] (ph), Investor Relations Director of the company. Please go ahead, Gwen.

Thank you, operator. Hello, everyone, and welcome to our earnings conference call. Joining us today are our Chairman and CEO, Mr. Nangeng Zhang and our CFO, Mr. Jin Cheng or James. In addition, Mr. Leo Wang, Head of Capital Markets and Ms. Xi Zhang, IR Manager, will 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 regarding 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 into such statements. In addition, during today's call and webcast, we will discuss 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…

Thank you, NG. And good day, everyone. This is James speaking at our Singapore headquarters. As NG stated at the top of the call, quarter two of the year 2024 was a particular quarter when we experienced a Bitcoin halving event, which takes place about every four years. Bitcoin price fluctuated from $71,000 to $56,000 and eventually landed at $61,000 in the quarter end. Total network hash rate performed considerable swings, but continued the growth trend. As we expected, customers were more active in quarter two to upgrade their mining machines compared to quarter one. And we used A15, A14 and A13 series to satisfy a diverse demand from various customer groups. Let me give a quick summary of our financial performance in quarter two. First, with considerable upside in demand and successful large scale deliveries of our new A14 series, we achieved a total revenue of around $72 million, which beat our guidance by around $2 million, marking a sequential growth of around 105%. Secondly, A14 delivery enabled a higher average selling price, which contributed to a narrowed growth loss of around $19 million, indicating a sequential improvement of around 49%. Thirdly, cash balance increased to around $67 million by around 22% sequentially. As of August 10, 2024, our self-mining hash rate reached around 4.5 exahash per second, which helped our owned Bitcoin accumulated to a total of 1,114 Bitcoins, which is a new high. Last but not least, with the A15 series announced, we collected orders and advanced payments from customers. The balance of customer advances increased to $51 million by 30% sequentially, indicating a solid second half year revenue foundation. Let's start to take a look at the profit and the loss. As said, in quarter two, our total revenue was around $72 million. Revenue from machine…

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] Your first question today comes from the line of Kevin Dede with H.C. Wainwright. Please proceed.

Good morning, NG and James or it’s afternoon over there. Thanks very much for having me on the call. I was wondering if you could give us your perspective on the -- I know NG alluded to it a little bit, but just on the inventory situation throughout the industry?

Thank you, Kevin. Maybe I take this one. I think the inventory level in quarter two actually compared to quarter one is a little bit eased, because the customer demand after halving actually boosted out, a lot of customers try to upgrade their mining machines. So we faced to the first wave of the demand. That means that the existing customers, they would like to upgrade the machines. They placed orders, some for contract sales in last year quarter four or quarter one. Some of them placed orders in quarter two directly for the current sales. So I think that the inventory situation changed to a little bit more optimistic situation, but still our competitors are still holding a big amount of inventory. That's something we heard, but it's better than quarter one end. I think that's my answer.

Thank you, James. I saw that your price per terahash stepped up very nicely from the March quarter, which I would expect was because you were selling more A14 series. But I was just wondering, if you could talk a little bit about the overall pricing trends and how you see that affecting demand?

Yeah I think that -- demand and the supply is always the most critical factor in our industry to decide the market prices. I think currently even we had the one wave of demand of upgrading machines, but still the price is still in the bottom, because no matter new products or older generation products, the selling price is still relatively low. I would expect if in the coming months Bitcoin price has some rapid growth, if that's the case, then it will drive the demand goes up, because there will be newcomers from energy industry to our industry to participate in the mining activity. If that's the case, the demand will be huge and it will be far beyond our supply capacity, because we have to lock the wafer supply six months before shipment. That means the supply side, we are linear and limited. But the demand side, if the Bitcoin price quickly grows, then we will see a big upside. If that's the case, the market price will come back in a significant way. Just like what happened in year 2020, we still remember in that November and December 2020, in that particular year, the mining machine price jumped from single digits to like 20 something and 30 in the end of quarter four. I cannot say history will repeat absolutely the same way, but I do think if Bitcoin has a big potential to grow faster in quarter four or in late quarter three, then we will see the demand coming back in a significant growing way. And at that time, our mining machine price will increase accordingly in also a significant way. So that's something we predict will naturally happen. Not if not in this year, it will in early next year. That's something we believe will happen. I just would like to share my [indiscernible] to you like this, Kevin. Thank you.

Yes, thank you very much, James. I really appreciate the optimism. Congratulations, NG and James, for a very nice quarter and the strong improvement and all the hard work.

Thank you, Kevin.

Thank you. Our next question is from the line of Shuang Sun with Guosheng Securities. Please go ahead.

[Foreign Language] Is the company considering shifting the power use for self-mining to provide electricity for AI service providers?

Hello, this is NG. I think at present we have no chance to shift to the electricity use in our mining operations to AI service providers. I think now primary focus remain on optimizing our mining business. Our mining companies feel relatively small and the returns from Bitcoin mining are more predictable and manageable for us, so making it worthwhile investment. However, I think we will continue to evaluate all potential opportunities and the strategies, always try our best to the company. Yes, thank you.

[Foreign Language] On August 8, the NASDAQ stock exchange released a statement on its official website showing that it is proposing to modify its rules regarding penny stocks to establish faster and stricter deletion procedures for companies with stock price below $1 per share. Does the company believe that this potential policy change has any impact on the company?

Thank you, Shuang Sun. I think we saw the proposed regulation, and I think it relates to a lot of discussion and a kind of lengthy process from proposal to final approvals. We will continue to closely monitor the dynamics of this kind of proposals. I think even the proposal is eventually passed, we believe it has little impact on our company. Because the proposed amendments include, I think two key points. The first is, if the company's stock price remains below $1 for 360 consecutive trading days, the stock will be suspended from trading on NASDAQ and moved to OTC market. Even the companies during the process of appealing to a hearing panel, I think that that's the first one. The second one is that, if a company raises its stock price through a reverse stock split but the price falls below $1 within a year, NASDAQ will immediately issue a delisting notice, although the company can still appeal and continue trading for 180 days. I think even if these amendments are approved, at least the company stock can still stay below $1 for up to 360 trading days or fall below $1 after a reverse split before facing delisting. I think it's quite a long time. I think two weeks ago, our stock price was above $1. So from a company's perspective, I think the recent stock price is mainly impacted by the overall decline in the US capital market in early August, I think which is mainly due to the trend reaction caused by certain lower than expected economic indicators. And also I think Japan's interest rate hike also caused certain leverage is broken. So from our perspective I think we will focus on our operation and try to make our financials better and better. I think in quarter two, I think the trend of operation is returning to growth. The revenue is doubling in quarter one and I think the operating loss is narrowed down significantly. So I believe the current stock price is in the range of undervaluation and I feel confident our stock price will be repaired with our continuous stable increasing performance. I think that's my answer, Shuang. Thank you.

[Foreign Language] Thank you.

Thank you. Our next question comes from the line of Bill Papanastasiou with Stifle. Please go ahead.

Good morning, gentlemen. Thank you for taking my questions and congrats on the sequential growth this quarter. For my first question, I was just hoping you could provide an overview of the manufacturing landscape today, where market share currently sits. And just a quick overview of how Canaan looks to gain market share in the near to medium term relative to some of your peers? Thank you.

Okay. I think the key to increase the market share remains our products. So we continue to invest in R&D to deliver special products. I think you can see compared to a year ago, our product portfolio is now more diverse. Our A14 series is in the progress of spot delivery during the second and third quarters of this year. And in May, we launched the new A1566 mining machine. It offers an average computing power of over 180 terahash per second with the power efficiency of 18.5 joules per terahash. And its performance is on par with competing products on the market. And in June, we introduced the liquid-cooled model, the A1566I, and achieves a computing power of 249 joules per terahash. And also, I just mentioned we have constantly shared our R&D roadmap transparency with our customers and partners. Our 10 plus joules per terahash level products are on track. And we expected to complete the design and the tape outs by the end of this year. And you know then, it's the mass production preparations. And maybe we will complete it in the first half of next year. So we also meet our customers' needs for one-stop customized mining solutions through comprehensive product offerings. And also we launched Avalon Nano 3. We entered the consumer market. So I think the second important factor is building a comprehensive sales system to [indiscernible] and covers various types of customers through a multi-channel approach, while placing greater emphasis on the marketing and promotion. For large clients, we have already partnered with several North American listed mining companies and are in discussion with more. And for the retail market, the computing power demand is high, but the customers are more scattered. We have seen good results by combining our own e-commerce platform with distributors clients to reach these customers. Additionally, we have established mining demonstration products in regions like the hot Middle East, serving as showcase to attract potential local customers who can see our machines performance and operations in real world conditions. However, I think we already recognize that our coverage of mid-sized customer groups is still lacking. So this represents one of our key growth areas moving forward. Finally, we adhere to our core value of integrity, believe strongly in the power of reputation. We are committed to do the right thing, even when it's difficult. We believe that as long as we continue to offer value propositions to the market and our customers, we will ultimately receive the market's recognition and the rewards. Thank you.

Thank you, I appreciate the clarity and overview with the question there. For my second and last question, we're just hoping to get some insight into the recent announcement by the Russian government to legalize cryptocurrency mining in the country. Could we expect to see a similar move by China? And what are your generic thoughts on this move by the government in Russia? Just given your experience of mining in the region, just curious to hear your thoughts on the news? Thank you.

Yes. I think As a U.S. business company, we do not conduct business in Russia and have no plans to do so. So this is in the consideration of compliance and reputation. In our mining operations, we employed diversified quality management strategy, continuously to access the economic returns of various mining collaborations and adjusting the project layouts accordingly. So we will deploy the -- in the regions with energy advantages. And when selecting project opportunities, we also place -- today we also place a greater emphasis on the legal framework and the policy stability of the region to ensure the robust risk management to protect our companies assets. Yes, thank you.

I appreciate the color and look forward to another quarter of strong growth in Q3. Thank you.

Thank you. [Operator Instructions] 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'm sorry. It looks like we do have a question from Kevin Dede with the H.C. Wainwright. Please go ahead.

Thank you. Hi, James. Hi, NG. Since we had a couple of more minutes, maybe you could talk a little bit more about your plan to expand to 10 exahash in the U.S. Is that site acquisition or partnership? How do you plan on building that?

Yes, I think we have some on negotiation corporate partners in the US and a few of them. So I think we will announce the details when we start the conference.

Yes, it's too early to discuss about the details, Kevin.

Yes, but for sure we will announce the details for that, yes.

Understood. Thank you gentlemen. I just thought I'd throw that out there, because it seems like an impressive goal. So again, thank you very much, and congratulations on the results.

Thank you, Kevin.

Thank you, Kevin.

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.

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

Thank you. That does conclude today's call. Thank you, everyone, for attending. You may now disconnect.