Canaan - Q4 2023

Transcript

Operator (participant)

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 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 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. James Jin Cheng. 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 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 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's website. With that, I will now turn the call over to our Chairman and CEO, Mr. Nangeng Zhang.

Please go ahead, Sir.

Nangeng Zhang (Chairman and CEO)

Hello, everyone. This is NG, the 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 quarterly results with you. In the fourth quarter of 2023, especially in December, the price of Bitcoin in general kept showing an upward trend, starting at around $27,000 at the beginning of the quarter and reaching an annual high of about $44,000 by the last week of the quarter. At the same time, the total network hash rate continued to rise, exceeding 500 EH/s. 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 end of the interest rate hike cycle and upcoming approval of a Bitcoin spot ETF have made industry participants, including miners, more optimistic about 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 detected. In such a rapidly changing market environment, we seized the favorable market window of this quarter, especially in December, achieving a total revenue of $49 million, including mining machine sales revenue of $44 million, much higher than the management's expectation of $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 exploring international markets such as North America, Southeast Asia, and the Middle East. Completing financing in the capital market with sufficient funds enable us to deploy in advance and meet the explosive demand in the upcoming bull market. Now let me go into more detail. After announcing the A14 series miners in September 25th, 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 the 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 terms 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. In terms of mining machine sales, we achieved approximately 5.47 million TH/s of computing power sold in the fourth quarter, a year-over-year increase of 192%, and a quarter-over-quarter increase of 49%. Mining machine revenue reached $44.1 million, representing a sequential increase of about 49%. Additionally, the contract sales for our A14 series mining machines received issued SBLC booking from customers this quarter, with accumulated contract sales orders exceeding 7.5 million TH/s with customer prepayments.

This encouraging growth in contract sales orders has elevated the company's level of customer advance as of the end of 2023. However, the gross margin of these pre-sales 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 its inventory allocation between contract sales, small 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 machine, and another order from Stronghold for 1,100 units of the A1346 mining machine.

Additionally, earlier deliveries include 11,000 units of A1346 model to Cipher and 2,000 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 Asia region, where we focus on channel sales, we achieved sales of 900,000 TH/s 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 the 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 $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. At 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 $50 million. At the end of the fourth quarter of 2023, our total energized mining computing power was 1.91 EH/s.

In Kazakhstan, following the acquisition of the necessary Type II license for mining, we have been collaborating with our local partners to resume mining operations. Despite challenges such as harsh cold weather and the need to reestablish cross-border accounts, we have made significant progress. We commenced re-energizing our mining machines in the first quarter of 2024, and the majority of them have now been successfully re-energized. 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 the regulatory stability in the projects 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 11 active mining projects globally, with a total of 2.8 EH/s 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 re-energization of some machines in Kazakhstan and the energization of machines in other projects. As of today, we have 2.1 EH/s 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 the shelf. We expected, we expect to gradually install the power of 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 the shelf.

Based on the estimated total computing power deployed, the estimated total power demand of all mining farms is 177 MW, with a weighted average electricity cost of around $0.05 per kWh, 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. Also, 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 investments, we have a leaner and a more efficient team, which is well prepared for the bull market.

Our sales efforts resulted in a significant increase in sales cash inflows, despite some non-cash provisions and impairments associated with promotional initiatives. These initiatives enable us to generate crucial cash inflows, and our destocking efforts are nearing completion. In general, our strong sales collection and fundraising contributed to a robust increase in the ending cash balance in Q4 2023. In the first quarter of 2023, through the issuance of preferred shares and ATM offering, the company has secured a net financing amount of about $86.2 million. In the first quarter of 2024, the company received another $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 due to during the bear to bull transition were very rapid, requiring early preparation of the supply chain and the 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 influx of funds from preferred shares and the ATM offerings has allowed us to advance our supply chain and the related production capacity preparations by at least two months.

This enabled increased investment in research and development, and accelerating product development progress. From a longer perspective, the benefits deliver may even exceed the two months timeframe, 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's spot ETFs, the price of Bitcoin has experienced a brief consolidation phase and recently broke through and stabilized above $50,000. With a combined effect of improved sales and successful financing settlements, our cash and the cash equivalents increased from $41 million at the end of the third quarter to $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 super wait-and-see period that occurs every four years. Coupled with the multiple factors of the Halving, the new year, 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 outlined above, we are providing a cautious outlook for the first half of 2024. We anticipate a revenue of approximately $33 million in the first quarter of 2024, and approximately $70 million in the second quarter. This forecast is based on the company's current market and operating conditions, and actually, the actual results may vary. 2023 was a challenging year for the entire industry. With unwavering faith, we overcome various obstacles and successfully navigated through the market downturn as planned. Even during times of this terror, 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 period cycle. Institutional investors, represented by Wall Street, launched a significant bull market with $69,000 price 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 ETFs 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...

Strive 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.

James Cheng (CFO)

Thank you, NG, and good day, everyone. This is James speaking at our Singapore headquarters. As NG stated at the top of the call, Bitcoin price grew significantly in quarter four, especially stayed high in December, and the market demand on machines quickly recovered before total hash rate exceeding 500 EH/s. 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 fund raising from ATM and preferred shares. Our strong sales collection and fundraising contributed to a positive ending cash balance, which reached $96 million at the end of quarter four, increased from $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 $49.1 million, which beat our guidance of $34 million by 44% favorable variance, and represented an increase of 47% quarter-over-quarter. Our revenue from machine sales was $44 million, and our mining revenue was $3.7 million. Regarding our machine sales, we delivered a total computing power sold of 5.5 million TH/s, 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 TH/s per second in quarter three to $8.2 per TH/s 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 900,000 TH/s delivery in quarter four, mainly from distributors. And our online store first time covered 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 satisfied. Considering both factors of power sold and ASP, our revenue from mining machine sales achieved $44 million, up 49% from $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 $0.6 million, up 133% from $0.2 million in quarter three, driven by the increased delivered volume. Specifically, for our mining machine sales, we accrued $55.5 million for inventory write-down, prepayment write-down, and provision for reserve for inventory purchase commitments in this quarter. The inventory write-down decreased sequentially by 16% to $45.1 million, which was driven by the accelerated destocking in this quarter.

Those write-downs and provisions are made under 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 $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 EH/s in 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 41% for our mining business in this quarter, which was mainly attributed to the average Bitcoin price increase from about $28,000 in the last quarter to over $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. 1.09 EH/s out of 2.0 EH/s in Kazakhstan have been successfully re-energized to normal in early January.

That makes our total energized computing power to 2.8 EH/s 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. We continue to expand our mining business with another 2.1 EH/s machines to be energized in quarter one and quarter two, as CEO mentioned previously. Shifting to our AI business, AI revenue was $0.3 million in this quarter, up 59% quarter-over-quarter. This growth was primarily driven by the increased sales volume of our AI, AI products. Now, turning to the expenses. Our operating expenses totaled $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 of 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 $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, 2024.

The net result of the foregoing was a non-GAAP operating loss of $78.3 million for this quarter, narrowed 29% year-over-year and 20% quarter-over-quarter, respectively. Benefited from the non-cash recognition for deferred tax assets, non-GAAP net loss was $53.9 million, narrowed 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 ADSs as own share lending equity, respectively. These financial instruments incurred an excess of fair value over proceeds received and a fair value change. These non-cash accounting treatments hit our Q4 bottom line with total $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 ADSs 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 $61.2 million from the ATM and $24.8 million from preferred shares financing facilities, respectively. We paid $35 million to secure our wafer supply by utilizing the fundraising proceeds. The other proceeds were also utilized for the wafer supply prepayment in January 2024. During this quarter, the cash outflow of $71 million for productions was offset by cash inflow of $75 million from sales, which was mainly contributed by spot sales of A13 series and advanced payments for A14 series.

So our cash flow from production operation turned positive with $4 million. Consequently, at the end of 2023, we held cash and cash equivalents of $96 million on our balance sheet, which was $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 $19.6 million as of 2023 year-end. This balance increased to 28.6x compared to $0.7 million at the last year-end, and 2.5x compared to $5.6 million at the last quarter-end. The majority of contract advances came from pre-sales of A14. It included, but not limited to those 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, we recorded accounts receivable of $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 deposit, which declined to 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 1st, 2024, which allow cryptocurrencies to be carried at the fair market value. If adopted with the price at January 1st, 2024, our cryptocurrency held by the end of 2023, we anticipate that the carrying value would increase approximately $80 million, based on latest price difference between market price and the booking price. The current fair market value of those owned Bitcoins is almost $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 28th, 2023, the date we reported our Q3 financial results to December 31st, 2023, we utilized the ATM for fundraising with net proceeds of $61.2 million. In late 2023, we closed the first tranche of preferred shares financing, raising total net proceeds of $24.8 million. In early January 2024, we closed the second tranche of preferred shares financing, raising total net proceeds of $49.7 million. The total proceeds of $136 million 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 $33 million, considering many of our customers are waiting for halving to generate more visibility about ROI of CapEx investment.

While for Q2 2024, we anticipate a revenue of $70 million, considering A14 series pre-order 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 give 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 Q4 2023 were $49.1 million, as compared to $33.3 million in the Q3 2023, and $58.3 million in the same period of 2022.

Gross loss in the fourth quarter of 2023 was $54.1 million, compared to $69.1 million in the third quarter of 2023, and $64.1 million in the same period of 2022. Total operating expenses in the fourth quarter of 2023 were $39.2 million, compared to $43.8 million in the third quarter of 2023, and $60.8 million in the same period of 2022. Non-GAAP loss from operations in the fourth quarter of 2023 was $78.3 million, compared to $97.4 million in the third quarter of 2023, and $110 million in the same period of 2022.

Non-GAAP net loss in the fourth quarter of 2023 was $53.9 million, compared to $64.7 million in the third quarter of 2023, and $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 $0.30. As of December 31, 2023, the company had cash and cash equivalents of $96.2 million. This concludes our prepared remarks. We are now open for questions.

Operator (participant)

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. To ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. Please stand by while we compile the Q&A roster. Thank you. We will now take our first question.

Shuang Sun (Blockchain Industry Analyst)

Hello?

Operator (participant)

Your first question is from the line of Shuang Sun from Guosheng Securities. Please go ahead.

Shuang Sun (Blockchain Industry Analyst)

Can you hear me?

Nangeng Zhang (Chairman and CEO)

Yes, please.

Shuang Sun (Blockchain Industry Analyst)

Okay. [Foreign language] How was your recent custom order? Did you see increased sales in mining machines as miners more aggressive with stock, mining machines preparing for the halving?

Nangeng Zhang (Chairman and CEO)

In Q4 2023, we exceeded our expectations in both our sales and pre-sales orders. Total computing power sold reached 5.5 million TH/s in this quarter. A year-over-year increase of 192%, and 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 the market expressed a slight slowdown in orders compared to Q4. This is a normal phenomenon, because 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 the deployment of mining machines for the upcoming full year cycle when they see more certainty. Generally, around one month before the halving, various 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 payouts of our next generation products. Thank you.

Shuang Sun (Blockchain Industry Analyst)

Okay. [Foreign language] How has the computing power selling price increased? How was the spot sales compared to contract sales? How was the sales of mining machines with higher power efficiency in terms of sales volume and ASP?

Nangeng Zhang (Chairman and CEO)

Entering the Q1 of 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 intensification in mining machine manufacturers' efforts to de-stock 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 pre-sale price has seen a gradual increase over the past four months. It is anticipated that the majority of A14 series deliveries will be concentrated in second and third quarters.

In Q4 2023, spot sales reached computing power of 5.47 million TH/s. And with the pre-sale orders surpassing 7.5 million TH/s. 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 of spot purchase. This reflects varying needs among the miners. Yeah, thank you.

Shuang Sun (Blockchain Industry Analyst)

Okay. Xiexie. Thank you.

Operator (participant)

Thank you. We'll now take our next question. The next question is from the line of Lucas Pipes from B. Riley. Please go ahead.

Lucas Pipes (Managing Director and Equity Research Analyst)

Thank you very much, operator. 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 wanna be? Do you wanna, you know, take on a lot of extra capacity, procure chips to really press forward in this environment? If you wanna be kind of guarded and think about potential downside risks post-Halving. Just curious how you kind of navigate between greed and fear in this environment. Thank you very much for your perspective.

Nangeng Zhang (Chairman and CEO)

Yeah, it's very interesting and high level question. You know, I think there's many uncertainties before the Halving. And for us, we believe that our main goal is to have... You know, there's only three significant players in this field. And we need to make targeted adjustments and customize for our product designs and with the best power efficiency and competitive pricing.

Also, you know, as AI is booming, so we need to secure the supply the wafer suppliers, especially for the second half of this year. We already signed some agreements with our suppliers. And for us, I think for myself, I think we are changing our strategy for self-mining. Before we, our target is for the cash flow. But from this year, we will change we change our strategy to the growth. So that means we will start to invest on the facilities and use our best products to do self-mining.

Especially, we will put our majority target at the well-regulated and developed country. Yeah. So, and yes, for the, I think, for the next few months, we have sufficient funds for us to do the production and R&D. But for, if the, you know, for the bull market, if we make the judgment that the time, the timing comes, we will use the capitals to do the expansion more aggressively, less than before. Yeah.

So, I think for us, the best products and, more important, self-mining strategy will and plus the capital will makes us make a better score by this bull market cycle. Yeah. I think James can make some add on this.

James Cheng (CFO)

Yeah, I think it's always difficult or challenging to balance between aggressive and conservative. You know, we do fundraising to support our R&D and support our capacity of wafer for future bull market. I think always we make decision together, and NG has a lot of experience going through the past cycles. So we always predict the bull market and bear market for future, and then we decide together about how you know how big the investment we are going to spend in the new machine design. And you know a lot of past experience helped, but we always face to new challenges just like mining just like you know in different generation of machines, we have to solve a lot of you know challenges in the R&D phase.

So I think it's not easy to describe all the operations, but we always, you know, carry the courage to face to the uncertainties. And, you know, we do go through a kind of balance between very aggressive and very conservative, and then we try to maximize the performance of machine sales and mining revenue together. So I think strategically, NG lead the company to do 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.

Nangeng Zhang (Chairman and CEO)

Thank you.

Lucas Pipes (Managing Director and Equity Research Analyst)

Thank you very much for all the perspective.

Operator (participant)

Thank you. We will now take our next question. Your next question is from the line of Kevin Dede from H.C. Wainwright. Please go ahead.

Kevin Dede (Managing Director and Senior Technology Analyst)

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. Understand you're at about 4.9 EH/s 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?

Nangeng Zhang (Chairman and CEO)

Hi, Kevin. What I want to mention again is, you know, for, we start our self-mining business in the second half of 2021. And we have been deploying and many projects, and I think gaining both experience and lessons. So, we have deployed more than 5 EH/s of the computing power, and energized over 28 EH/s through the like, Central Asia, North Africa, Africa, South America, Middle East, and so on. But in 2024, while mainstream maintaining our mining strategy, this year, we will adjust and upgrade our specific operating tactics.

Firstly is, we pay more attention for factors such as legal system and, regulatory, stability, enhance the risk of control. So that means, we will, change our, major targets, major regions for our, mining operations, even though it's maybe, a little bit costly or, will take a slightly longer, deployment time. And also we will, expand our scale, where, yeah, and, you know, we will, shift from, cash flow, oriented to growth oriented. What it mean is, I think in the past, we, when we have, inventories, we will put the inventories to, to do self-mining. This is, make the inventories to generate, cash flow for the, the company.

Yeah, and from now on, our target is to grow the self-mining business, not only the cash flow generation. So that means, we will use our best models to do the sale. If you're using the better machines, it will prolong your investment span and reducing the operational risks, such as the mining revenue cannot reach the power cost or something. So it will longer your lifetime of your entire investments. Yeah, and also, you know, in the past, we maybe cooperate with hosting companies.

We have no self-held facilities, and we are not doing any like self-construction or something. But today, after over two years, over three years, I think, so we learned that it is it's the value of the stable facilities, the power resources is really, really very important for this industry. So we will go deeper to participate with mining operations and more exploring more collaborations. Yeah, thank you.

James Cheng (CFO)

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

Kevin Dede (Managing Director and Senior Technology Analyst)

Okay, NG and James, thank you for the detail. NG, you mentioned, you mentioned your next generation machine. I'm gonna assume it's gonna 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?

Nangeng Zhang (Chairman and CEO)

Okay. Usually, we will publish that details when we have the test machine tested, finish the testing. But, I think for the... You know, the machine is, you know, the machines, we just deployed the machines, so we're not selling the chips to our customers. So, it's very important to know that the performance of mining machines not determined by the process node of the chips or the manufacturer of the wafers. So for a long time to avoid the confusion among our customers, we do not emphasize the specific foundry partners. Yes, there's many other reasons, but this is the main reason.

That's focusing instead on the actual performance metrics of the product. We have planned this. Our plan is to about 20% performance improvement every generation. If it's less than 20%, I think it's not very valuable to upgrade a new generation. So 20% is our target. And also in the past, I think there's 9-12 months between each generations. And today, we are work very hard to shorten the period.

So, that means our target is to have at least one generation this year or, and also, maybe, if everything is going 100% right, we will have another generation in the maybe Q1 next year or something. Then every generation is we will have like 20% of the improvements. So, I think another target is for the finance side. Yes, we want the new generation have some revenues this year. This is our target. That means we need to put the next generation in mass production this year. Yeah. Yeah, this is maybe is what I can say now.

There's no very accurate numbers, and we will have the data numbers as soon as possible. Yeah, we will publish it. Mm-hmm.

Kevin Dede (Managing Director and Senior Technology Analyst)

Thank you, NG. That detail was incredibly helpful, and I really appreciate it. Last question for me, probably best for James. Inventory was down about 34% Q2 to Q3. Understand that the A13 is now completely out of inventory. I was wondering if maybe you could give us a little insight on the inventory that you are carrying. Maybe how much is, you know, the air-cooled versus liquid-cooled, and what your expectations are in for that mix in the A14 series?

James Cheng (CFO)

Yeah. Kevin, I think we are in the transition between A13 series to A14 series. I cannot say we have already completed the inventory clearance of A13, but luckily, A13 can also generate profit for miners after having in our calculation. So it looks like the demand is still there, and, and, you know, we can still get a lot of A13 small sales orders even in quarter one. So, looks like A13 inventory clearance will last in quarter one and quarter two. So looks to me A13 has not, you know, been completely cleared yet.

A14, I think, we will ship small batches in quarter one, like in March, and mass production and mass shipment will happen in quarter two. So, we have already got a lot of contract sales orders, like NG mentioned, the 7.5 million TH/s. And, you know, this number is still, you know, being updated every day. Looks like customers are still placing orders to get A14. So looks like the transition is better than what I have planned in November. At that time, I, I was thinking A13 series will be very difficult to clear, but it looks like the progress is better than what I have expected. The cash flow tends to be positive.

The operating cash flow tends to be positive in quarter four, and, you know, that's very good looks to me.

Kevin Dede (Managing Director and Senior Technology Analyst)

Thank you very much, James.

James Cheng (CFO)

Did I answer your question?

Kevin Dede (Managing Director and Senior Technology Analyst)

Yes, yes, yeah, you helped.

James Cheng (CFO)

Yeah.

Kevin Dede (Managing Director and Senior Technology Analyst)

Yes, you helped. I understand that you might not want to be extremely granular regarding, I think it's about $142 million of inventory and what might be A13 and what's A14, but I appreciate your insight, sir. I think it was good to see the improvement in the fourth quarter. Congratulations on the hard work to you gentlemen and your entire team.

James Cheng (CFO)

Thank you, Kevin.

Nangeng Zhang (Chairman and CEO)

Thank you, Kevin.

Operator (participant)

Thank you. We will now take our next question. This is from the line of Michael Legg from The Benchmark Company. Please go ahead.

Michael Legg (Managing Director and Emerging Growth Equity Research Analyst)

Thanks. 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 your revenues? It looks like, you know, with the ATM and the tranches, it's moving up pretty high. Can you just talk about that?

James Cheng (CFO)

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 $125 million. As of today, we have successfully completed the settlement of $75 million of the financing. Due to the terms of preferred stock financing agreement, the closing of the third tranche of preferred shares will be contingent upon mutual agreement between both parties. That means, currently, we are not going to immediately execute the third tranche. That means, $75 million is the total what we have completed, and we are not going to immediately, you know, do another tranche.

You know, it's a little bit complicated to say how big the common shares increased, but you can already see we have increased the common shares, and that's already 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. Let's see how they are going to convert the preferred shares to common shares. But currently, not yet updated to us.

Michael Legg (Managing Director and Emerging Growth Equity Research Analyst)

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

James Cheng (CFO)

Yeah. From accounting rules, that's, you know, we recognize the fair value of both the first and second tranches of preferred stock based on the evaluations from an independent third party. You know, through our, you know, auditor, they, they found an independent third party to evaluate the preferred stocks. Then, you know, we also recognize the pre-delivery shares associated with the preferred stock as an ADS lending equity on a fair value basis. So the accounting treatment of these three segments of preferred share financing, you know, had a certain impact on our bottom line, of quarter four 2023, it's about $70 million. This total including the first tranche and the, and the second tranche, and also the lending, preferred shares, so lending equity.

So, putting all this together is about $70 million impact on our P&L.

Michael Legg (Managing Director and Emerging Growth Equity Research Analyst)

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

James Cheng (CFO)

We haven't yet 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.

Nangeng Zhang (Chairman and CEO)

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

Michael Legg (Managing Director and Emerging Growth Equity Research Analyst)

Okay. Thank you very much.

James Cheng (CFO)

Thank you, Michael.

Nangeng Zhang (Chairman and CEO)

Thank you.

Operator (participant)

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.

James Cheng (CFO)

I think, 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 (participant)

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