Ladies and gentlemen, thank you for standing by and welcome to Canaan Inc.'s third quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. After management 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 today, Gwyn Lauber, Investor Relations for the company. Please go ahead, Gwyn.
Thank you, operator. Hello, everyone, and welcome to our earnings conference call. Joining us today are Chairman and CEO, Nangeng Zhang, and our CFO, James Jin Cheng. Leo Wang, Vice President of Capital Markets and Corporate Development, and Xi Zhang, Senior IR Manager, will also be available during the question-and-answer session. Our CEO will start the call by providing an overview of the company and performance highlights for the quarter.
Our CFO will then provide details on the company's operating and financial results for the period before we open up the call for your questions. Before we begin, 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 operating results and the performance of the company.
These statements speak only as of today, 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, 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, Nangeng Zhang. N.G., please go ahead.
Thank you, Gwyn. Hello, everyone. This is N.G. Thank you for joining today's earnings call. Over the past few quarters, we have discussed Canaan's strategic transformation on several occasions. Today, I would like to begin with the changes taking place in our industry, then explain how we are adapting our operations and share the latest progress in our transformation. First, the Bitcoin mining hardware industry is undergoing profound structural changes. Demand remains weak, industry inventories are elevated, and hardware selling prices remain under pressure. At the same time, rapidly growing AI demand is absorbing significant advanced node chip manufacturing capacity, driving wafer fabrication costs sharply higher and tightening supply. As a result, even higher-performing next-generation mining machines may be difficult to produce at a reasonable cost and generate adequate commercial returns.
We expect these factors to constrain the production and deployment of new mining machines over the next few years, making it difficult for Bitcoin network hash rate to sustain its past pace of growth. For operators with low-cost power and existing equipment, this could improve long-term mining economics. In response, Canaan is adjusting its approach to R&D, manufacturing, and capital investment. Over the past two quarters, several of our next-generation mining ASIC development projects have been completed or are substantially complete. We have received some engineering samples with test results meeting our design expectations, and additional samples continue to arrive. We believe these technological advances are sufficient to meet market needs over the next several years. This enables us to significantly reduce ongoing R&D spending on new products while retaining the ability to begin mass production when commercial conditions are appropriate.
We will continue to pursue economically attractive opportunities in mining hardware sales and Bitcoin mining. But we will no longer rely on sustained large-scale investments and successive product generations to drive the company's growth. Canaan's long-term focus is shifting towards energy and AI HPC computing infrastructure. This transformation rests on a clear business foundation. Through years of Bitcoin mining operations in North America, we have developed expertise in power procurement, site development, equipment deployment, and operations management, while building long-term relationships with utilities, local communities, and partners. Since 2025, we have deliberately applied these capabilities to developing power resources on a large scale. As demand for AI infrastructure grows rapidly, land and infrastructure with reliable access to power are becoming critical to the industry's development. Today, I am pleased to share an important milestone.
Our 1GW large-load project in Duval County, Texas, recently received a conditional Studied Load – Firm classification under ERCOT's Batch Zero process. This achievement reflects our team's sustained development efforts and investment, and marks a substantive step forward in the grid interconnection process. We are continuing to advance the remaining grid interconnection procedures. On the commercial development side, we are engaging in deep discussions with a U.S. institution with an investment-grade credit profile regarding a potential strategic partnership.
We believe partners with strong capital resources, credit support, and the ability to deliver large infrastructure projects can help Canaan participate more efficiently in major energy infrastructure developments. This is particularly important for a company of our size. By drawing on our expertise, we can play a meaningful role in the value chain of large projects while controlling our capital commitments and the risk and the earning returns with our contribution.
We aim to build this collaborative development model into a sustainable business over the long term. The significance of this progress extends well beyond a single project. AI HPC data center infrastructure represents a substantial market opportunity, but it also requires significant capital, specialized expertise, and long development and construction timelines. Bitcoin mining, as another form of high-density computing application, offers greater flexibility. It can help the grid balance peak and off-peak power demand and provide additional value to local communities through heat recovery and other uses. Over the long term, Canaan believes power resources can serve different purposes. For projects suited to AI HPC, we will prioritize the corresponding development and partnership opportunities. For lower-cost power resources that are better suited to Bitcoin mining, we are also open to prioritizing Bitcoin mining.
We will assess the economics and development conditions of each project and the flexibility to select the business model that creates the greatest value. In addition, Canaan has historically adhered to a philosophy of developing jointly with partners across the ecosystem. We believe this approach remains equally applicable to today's AI HPC development projects and can help the company go further and more steadily. At the same time, we are advancing another 1GW power resources project in Zapata County, Texas. This project is in early-stage development, with preparations for grid studies underway. The milestone in Duval and our continued process in Zapata demonstrate that we are gradually building both a pipeline of power resources projects and an ongoing development capability in North America. We aim to translate the industry relationships and execution experience we have accumulated over the years into an infrastructure business that creates sustained value.
Finally, let me turn to capital discipline. We are taking firm action to control operating expenses, further reduce administrative costs and R&D spending, and strictly manage new production commitments and capital investment. For large infrastructure projects, we will prioritize structures that draw on our expertise, bringing in partner capital and allocated risk appropriately. Our goal is to use less of our own capital to participate in higher value projects while gradually improving shareholder value and capital efficiency. I want to emphasize that Canaan's transformation goes beyond the shift from Bitcoin mining to AI HPC data centers. More fundamentally, we are shifting our focus from capital expansion to generating returns on capital and ultimately enhancing shareholder value.
This requires us to apply strict capital discipline to our treasury policy, R&D spending, and capital investment planning, allocating capital only to opportunities that can clearly create shareholder value at a manageable level of risk. We must be equally disciplined about taking on debt or diluting shareholders. We will pursue growing only when it compounds shareholder value and strengthens our appeal to institutional investors. The operating environment remains challenging, but Canaan's transformation is moving from strategy to execution. Building on years of technological development, we have completed a major phase of R&D and begun to make tangible progress in energy infrastructure. Our business priorities and paths forward are becoming clearer, and I am confident in this direction. We will remain focused on project execution, capital efficiency, and commercial returns, demonstrating the value of this transformation through sustained operating results. Thank you, everyone.
Now I will turn the call over to James to review our Q3 financial results.
Thank you, N.G., and hello, everyone. This is James speaking in our Singapore headquarters. Just now, N.G. described the two shifts underway at Canaan. First is from Bitcoin mining toward energy and AI HPC infrastructure, and more fundamentally, from capital expansion toward capital returns and shareholder value. My remarks today will show how both are reflected in our numbers this quarter. First, the capital we have committed to our energy projects, then our treasury and shareholder actions, and finally, our third quarter results and outlook. The clearest example this quarter is our Duval County project. As of September 30, we held $50 million in cash collateral for a letter of credit in relation to power projects. This is a concrete commitment of capital behind the milestone N.G. just described. The funds remain on our balance sheet as restricted cash.
Cash and cash equivalents were $22.8 million as of September 30. The decline from the end of June mainly reflected the funds we moved into the collateral account. Including the $50 million collateral, our total cash position was $72.8 million, up 10.3% from the end of June. Beyond the collateral, we had approximately $3.3 million in project prepayments as of September 30 related to our infrastructure plans. in October, we also completed an approximately $1.1 million power-related land purchase for our 1 GW power resource project in Zapata County, Texas. Securing suitable land is one of the core development capabilities. This piece of land gives us a base for application for power interconnection and reflects our commitment to building a lasting presence in the United States.
For large infrastructure projects, we intend to bring in capital from partners and minimize development uncertainty so that we can participate in high-value projects with less of our own capital. The same discipline guides how we manage our treasury. N.G. also emphasized discipline in our treasury policy. During the third quarter, we monetized our Ethereum holdings and a portion of our Bitcoin holdings, generating approximately $14 million in cash. The average selling prices were approximately $79,000 per Bitcoin and $2,400 per Ethereum. Of this proceeds, we used $5.4 million to repurchase 13.6 million ADSs. We regularly review our treasury strategy, weighing the potential returns from holding digital assets, investing in our businesses, and repurchasing our shares. We believe our shares are undervalued relative to our long-term value, so we prepared to allocate a portion of our capital to buybacks.
We believe our current share price does not fully reflect our long-term value, and share repurchases are an important capital allocation priority for us. Our Board has approved a new share repurchase authorization of up to $100 million over the next 12 months, under which we are launching an initial program of up to $20 million. As our available funds grow, we intend to pursue repurchases more actively. The pace and scale of repurchases will depend on our financial position, market conditions, and applicable regulations. We are also planning an ADS ratio change. The change is designed to preserve the overall economic interest represented by investors' ADS holdings. By increasing the per-ADS trading price, we believe it could make our ADSs more accessible to institutional investors whose investment policies limit holdings of lower-priced securities.
As our business increasingly centers on energy and computing infrastructure, where progress is measured over quarters rather than months, we have discontinued our standalone monthly mining report. Key mining metrics will be included in our quarterly results. We will continue to announce material developments separately when timely disclosure is required under applicable rules. During the third quarter, we appointed KPMG in Singapore as our auditor, succeeding KPMG in Beijing. I would like to thank the KPMG Beijing team for their professionalism and support, and welcome the KPMG Singapore team. The change aligns our audit arrangements more closely with our increasingly international operations. Now let me turn to our third-quarter results. For the third quarter, we reported revenue of $14.5 million, within our guidance range of $11 million-$15 million.
Net income was $8.0 million, driven primarily by $51.9 million in fair value gains on digital assets and related financial derivatives, reflecting the recovery in Bitcoin prices during the quarter. Adjusted EBITDA was $22.4 million and also benefited from this gain. If Bitcoin prices continue to trend upward, the appreciation of our accumulated digital assets could further contribute to our profitability. This aligns to our digital asset treasury strategy. Our mining gross margin improved significantly to close to 30% in the third quarter, up from about 20% in the second quarter. We generated 133 Bitcoin during the quarter. Even after monetizing a portion of our holdings, we held approximately 1,875 Bitcoin at September 30th.
By maintaining a substantial Bitcoin treasury through the downturn, we were able to participate in the subsequent price recovery, and the increase in the value of these holdings made an important contribution to our results this quarter. Total operating expenses were $34.2 million, down 15.5% from the prior quarter. As N.G. mentioned, several of our next-generation mining ASIC projects have been completed or are nearly complete, and we believe these results can support market demand over the coming years. As a result, we no longer need to heavily rely on continuous large-scale R&D investments to drive growth, which allows us to continue managing our operating expenses prudently. Our inventory declined to $119 million on September 30th, marking its lowest level in the past five quarters, given the demand environment and rising wafer costs. We are carefully managing new production commitments and aligning purchases with actual customer demand.
For Project ABC, we recognized $1.6 million in equity investment income during the quarter. This gain was non-cash and included acquisition-related accounting adjustments. In cash terms, we received $1.9 million from ABC, comprising $1.2 million in distributions and $0.7 million in sales proceeds. For us, these cash receipts are the meaningful measure. Our focus remains on ABC's operating performance and its ability to generate real cash returns over time. Beyond our own mining operations, we are also expanding the applications of our mining equipment to help customers get the most value from every megawatt used. In Northern Europe, an 8MW district heating project repurposes waste heat from liquid-cooled computing equipment to provide heating for approximately 2,800 households. We are also exploring greenhouse heating in Canada, home heating through Avalon Home, and using associated gas from oil fields that would otherwise be flared.
In summary, this quarter is a profitable quarter with committed capital to our energy strategy, return of capital to shareholders, and tight control over costs, expenses, and inventory. As Nangeng Zhang said, our transformation is moving from planning to execution. On the financial side, we will continue measuring the progress by capital efficiency and returns. We will remain disciplined in our use of capital and pursue growth only where it compounds value per share. Turning to our outlook, we expect total revenue for the fourth quarter of 2026 to be between $18 million and $22 million. This outlook reflects our current assessment of the market and the operating conditions. Actual results may vary with changes in Bitcoin prices, industry demand, and other market conditions. Thank you. Operator, we are now ready to take questions.
Thank you. We will now begin the question-and-answer session. As a reminder, if you wish to ask a question, you will need to press star, one on your telephone and wait for your name to be announced. To withdraw your question, please press star, one again. Once again, if you wish to ask a question, please press star, one on your telephone. We will take our first question. Your question comes from Kevin Dede from JonesTrading. Please go ahead. Your line is open.
Hey, guys. Thanks for taking my questions. This is Sky Moore calling in for Kevin Dede. My first one is, with the next ASIC, A16 ASIC team largely complete, what specific market conditions would lead you to start mass production? Where should R&D spending settle, and how do you plan to work down the remaining inventory?
Hi, Kevin. I think over the past two quarters, we have completed or substantially completed several next-generation mining ASIC development. During this quarter, we have received some of the engineering samples, and we have tested them, and the test results meet our design expectations, and additional samples are arriving. I think this technology portfolio can support the market demand over the next several years. Our next step is to determine when commercial conditions is justified bringing these technologies into volume production. Advanced node wafer costs have risen significantly, while mining equipment demand remains very weak. We will therefore consider customer demand, production cost, and expected returns when setting the production schedule. I think by this technology portfolio allow us to substantially reduce ongoing mining ASIC R&D spendings, while retaining the ability to launch new products where appropriate.
That is consistent with us broader transition, continue to pursue economically attractive mining equipment opportunities, while directing more resources towards energy and AI HPC infrastructure. Thank you.
Great. Thanks for all that. My next question would be, with most of the Bitcoin pledged against loans and unrestricted cash floating around, what, $23 million, how do you guys plan to fund that $20 million buyback alongside the Duval build-out, and what would lead you towards the full $100 million? Thanks.
I think we believe current share price does not fully reflect the company's long-term value. Buybacks are very important capital allocation priority for the company. After providing normal operations and also committed project funding needs, we would like to become more active in doing repurchasing shares. I think we have already taken action in the third quarter. We generated approximately $14 million in cash from monetizing Ethereum and a portion of our Bitcoin holdings, and used already $5.4 million of those proceeds to repurchase shares. Recently our Board approved a new program of up to $100 million over the next 12 months. We started from a $20 million program, and I think our direction is very clear. As long as we continue to see the attractive value in the shares, buybacks will be one of the priority uses of additional available funds.
I think the timing and the size of repurchase will reflect our funding position, market conditions, and applicable regulatory requirements. We will take pace, and we will consider the market situation and step-by-step do this stock repurchase program. Hope that answers your question.
Yes. Thanks so much.
Thank you.
Thank you.
Thank you. We will take our next question. Your next question comes from Ben Sommers from U.S. Bancorp BTIG. Please go ahead. Your line is open.
Hey, thank you for taking my question. I wanted to ask on the Duval County site, just wanted to ask a bit more on the discussions you're having with the potential partner there. Would this be a potential partnership where you could give up some equity in the site? Would the partner kind of handle the development process? Just how do you think about what you want from that strategic partner?
Yeah. We are considered by confidentiality agreements and are not in position to disclose further details at this time. Our objective is to generate positive cash flow from these projects, which would support the share repurchase and provide funding for subsequent power resources development, land acquisition, and related activities. Thank you.
Super helpful. Then switching over, talking about the heating applications of the ASICs, can you just talk a bit about how that is being incorporated into the development pipeline here as we also manage the inventory and try to optimize the balance sheet?
Let me see. Your question? We have a corporate in North Europe. Currently, we already deployed several megawatts of our equipment, generating over 80 degrees Celsius for about 2,800 families for the heating. Now, it already generates $1.1 million in revenue. I think, sorry, it is about an 8 MW hydro-cooled mining equipment project we already delivered and in operation. It uses recovered mining heat to serve about 2,800 households. These applications create value from both mining and heating, and the remaining area we are developing. Still, we have ongoing contracts in negotiation, and I think the scale of the heating program will scale up. Thank you.
Super helpful. Thank you for taking my questions.
We will take our next question. Your next question comes from Kevin Cassidy from Rosenblatt Securities. Please go ahead. Your line is open.
Yes. Thanks for taking my question. The midterm elections are top of mind for investors, and I just want to understand how Canaan is set up for the CLARITY Act, and it does not look like that would pass, and whether you have a plan B on digital assets.
I think overall, we expect the impact to be limited. The CLARITY Act mainly concerns regulatory framework for digital assets market, and our existing operations do not depend on its passage. Our primary focus is shifting towards energy and AI HPC infrastructure, where its main drivers are power resources, project economics, and customer demand. We will continue to monitor policy developments, but they do not change our current strategic direction. Thank you.
Okay, thanks. Maybe as long as you are mentioning energy and you have these facilities in Texas, are you expecting any issues with the change in the government in Texas, the governor?
I think currently, there is so much news coming out this week. Now I think we are looking closely to any kind of changes in the policy, especially in Texas. Personally, I think the energy infrastructure is quite useful, and I think it is good for America. Our focus is on the early-stage energy infrastructure development. Currently, we are not focusing on building big AI HPC data centers. We expect to earn returns that reflect our contribution while keeping the capital requirements and the risks manageable. Thank you.
Okay, understood. Thank you.
Thank you. We will take our next question. Your next question comes from Nick Giles from B. Riley Securities. Please go ahead. Your line is open.
Thank you, operator. Hi, guys. Good to see some continued progress at these Texas sites. I was curious if you could outline some of the next steps before the classification becomes final at Duval, and how we should think about the ultimate timing of energization there, and how much power you think would be available initially.
Yeah. I think we are advancing two 1GW power projects in Texas. The Duval County project has received a conditional Studied Load – Firm classification in the ERCOT Batch Zero process. Yeah, and we are progressing the subsequent grid procedures. The Zapata County is in early stage development and the preparation for grid studies. That means it will be a few months later than Duval. For timing, we encourage investors to follow ERCOT announcements. For the next stage of grid studies and the capacity allocation at Duval, we are currently looking broad towards 2027, when the specific schedule is subject to ERCOT's subsequent update. Thank you.
Okay, makes sense. Thanks, N.G. Maybe just next, with Bitcoin up about 30% since the end of the second quarter, what kind of visibility do you have on demand as we look to 2027? What's driving the step-up in revenue in the fourth quarter? Thanks.
To be honest, we do not have yet seen a meaningful recovery in mining equipment demand. Higher Bitcoin prices have not translated sufficiently into new equipment orders. Customers remain very focused on payback periods, and current mining returns and the equipment price are not yet attractive enough to support large-scale new purchases. We remain cautious about conventional mining equipment demand in the fourth quarter, and we will schedule production and deliveries against actual orders. Our current Q4 total revenue guidance is $18 million-$22 million. That includes mining equipment sales and other business revenue. It should not be interpreted as evidence that demand for new machines has recovered. Thank you.
Okay, makes sense. Well, I appreciate the update nonetheless, and continued best of luck.
Thank you. We will take our next question. Your question comes from Ian Generous from Compass Point Research & Trading. Please go ahead, your line is open.
Hi, everyone. This is Ian Generous calling in for Michael Donovan. Thanks for taking our questions. Firstly, just looking on inventory, how is Canaan's position today, including finished miners, chips, and wafers on hand, and then any outstanding purchase commitments?
Let me see. I think by the end of third quarter, the carrying value of our inventory was approximately $8.2 million, down significantly from $25.3 million in second quarter. The details of our purchase commitments are commercially confidential, so we cannot disclose the specific amount. Some of the wafers are secured earlier, with price relatively low, and we are deferring delivery with our suppliers' support. I think further write-down remain a risk, but the launch of next-generation product is not the only consideration. The value of existing inventory also depends on whether new machines can be produced at scale to competitive cost, actual market selling prices, and customer demand. With wafer costs now substantially higher, even a more energy-efficient next-generation product may not be able to reach the market at scale at a sufficiently low price.
We will continue to assess inventory value and record any necessary write-downs or provisions as appropriate. At the same time, we will align production with orders and control new purchase commitments and inventory risk. Thank you.
Thank you. That's helpful. Looking at demand for mining rigs across North America and the rest of the world, our customers, do you see, are they pausing orders, and how are they financing their purchases?
Okay. I will say a bit more about this. I think weak demand for mining equipment is a global issue, not only in North America, driven primarily by inadequate investment returns. I think we can do a simple calculation, can illustrate this challenge. At current mining revenue of approximately $0.023 per terahash per day, and in average, the electricity cost is about $0.015 per terahash per day. So, the gross margin is only about $0.017 remaining after electricity. Assuming revenue and the electricity cost stay constant, and before other operating and financing costs, the equipment price would have to be about $6 per terahash. Based on our understanding of industry costs, that is well below the cost of any existing industry mining equipment inventories across the industry.
Producing new machines at today's much, much higher wafer prices would widen the gap between production costs and the prices customers can justify paying. AI is also competing for power and sites, making low-cost mining locations harder to secure in some regions and putting upward pressure on electricity prices. Even customers who can obtain financing may therefore struggle to put development, the deployment opportunities that offer reasonable returns. You can see the trend in network hash rate. The total network hash rate is a constant with this assessment. Hash rate has declined overall from its 2025 peak, with periods of recovery, but it has not returned to that height. Also, based on our market observations, mining equipment used for electric heating in mainland China has been switched back on as winter approaches, contributing a seasonal increase in hash rate.
It primarily reflects existing equipment returning into operation rather than new purchases. Taken together, network hash rate, hash price, and equipment selling price indicate to us that the market for new machines are still contracting. We are not optimistic about a near-term recovery in demand. Thank you.
That sounds great. Thank you very much.
Thank you. I'd like to turn the call back over to the company for any closing remarks.
Thank you, operator, and thanks, everyone, for joining us today. If you have any additional questions, feel free to reach out to us, and we look forward to speaking with you throughout the quarter. Thanks very much.
This concludes today's conference call. Thank you for participating. You may now disconnect.