Cipher Mining (CIFR) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements of Cipher Mining Inc. for the period ended September 30, 2022, including the balance sheets, statements of operations, changes in stockholders' equity (deficit), and cash flows, along with detailed notes explaining the company's accounting policies, financial instruments, and significant transactions Condensed Consolidated Balance Sheets The condensed consolidated balance sheets provide a snapshot of Cipher Mining Inc.'s financial position as of September 30, 2022, compared to December 31, 2021, highlighting significant changes in assets, liabilities, and stockholders' equity Assets (in thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------------- | :----------- | :----------- | | Cash and cash equivalents | $28,111 | $209,841 | | Total current assets | $69,774 | $223,660 | | Deposits on equipment | $200,033 | $114,857 | | Property and equipment, net | $40,751 | $5,124 | | Investment in equity investee | $31,690 | $- | | Total assets | $407,493 | $354,167 | Liabilities and Stockholders' Equity (in thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------------- | :----------- | :----------- | | Total current liabilities | $19,609 | $499 | | Total liabilities | $24,393 | $636 | | Total stockholders' equity | $383,100 | $353,531 | | Total liabilities and stockholders' equity | $407,493 | $354,167 | Condensed Consolidated Statements of Operations The condensed consolidated statements of operations detail the company's financial performance for the three and nine months ended September 30, 2022, compared to the corresponding periods in 2021, showing a significant shift from net loss to net income, primarily driven by changes in the fair value of derivative assets Three Months Ended September 30 (in thousands) | Metric | 2022 | 2021 | | :-------------------------------- | :----------- | :----------- | | General and administrative | $17,755 | $2,283 | | Change in fair value of derivative asset | $(85,658) | $- | | Equity in loss of equity investment | $8,345 | $- | | Operating income (loss) | $59,233 | $(2,283) | | Net income (loss) | $59,292 | $(2,421) | | Net income (loss) per share - basic | $0.24 | $(0.01) | Nine Months Ended September 30 (in thousands) | Metric | 2022 | 2021 (Eight Months) | | :-------------------------------- | :------------------ | :------------------ | | General and administrative | $51,849 | $2,942 | | Change in fair value of derivative asset | $(85,658) | $- | | Equity in loss of equity investment | $20,577 | $- | | Operating income (loss) | $12,353 | $(2,943) | | Net income (loss) | $12,574 | $(3,082) | | Net income (loss) per share - basic | $0.05 | $(0.01) | Condensed Consolidated Statement of Changes in Stockholder's Equity (Deficit) This statement outlines the changes in stockholders' equity for the three and nine months ended September 30, 2022, and the corresponding periods in 2021, reflecting impacts from net income, share-based compensation, and common stock transactions - Total Stockholders' Equity (in thousands) * Balance as of June 30, 2022: $313,339[29] * Net income for Q3 2022: $59,292[29] * Share-based compensation for Q3 2022: $10,494[29] * Balance as of September 30, 2022: $383,100[29] - Key Changes (Nine Months Ended September 30, 2022, in thousands) * Balance as of December 31, 2021: $353,531[33] * Share-based compensation: $30,072[33] * Net income: $12,574[33] * Common stock cancelled: $(10,000)[33] * Balance as of September 30, 2022: $383,100[33] Condensed Consolidated Statements of Cash Flows The condensed consolidated statements of cash flows present the cash inflows and outflows from operating, investing, and financing activities for the nine months ended September 30, 2022, and the eight months ended September 30, 2021, showing a significant decrease in cash and cash equivalents in 2022 Cash Flows Summary (in thousands) | Activity | Nine Months Ended Sep 30, 2022 | Eight Months Ended Sep 30, 2021 | | :-------------------------------- | :----------------------------- | :------------------------------ | | Net cash used in operating activities | $(8,891) | $(27,100) | | Net cash used in investing activities | $(169,762) | $(74,476) | | Net cash (used in) provided by financing activities | $(3,077) | $383,853 | | Net (decrease) increase in cash and cash equivalents | $(181,730) | $282,277 | | Cash and cash equivalents, end of period | $28,111 | $282,277 | - Noncash Investing and Financing Activities (Nine Months Ended Sep 30, 2022, in thousands) * Equity method investment acquired for non-cash consideration: $93,208[39] * Common stock cancelled: $10,000[39] * Right-of-use asset obtained in exchange for operating lease liability: $5,859[39] Notes to Unaudited Condensed Consolidated Financial Statements These notes provide detailed explanations and additional information supporting the unaudited condensed consolidated financial statements, covering the company's organization, significant accounting policies, fair value measurements, and specific financial accounts and transactions NOTE 1. ORGANIZATION AND BUSINESS Cipher Mining Inc. was formed through a Business Combination on August 27, 2021, specializing in Bitcoin mining in the U.S. The company began mining operations in February 2022 at the partially-owned Alborz Facility and is actively building out wholly-owned and partially-owned sites. Bitfury Group holds an 81.6% beneficial ownership, giving them control. The company faces risks related to liquidity, limited business history, and global economic conditions like COVID-19 - Company Formation: Cipher Mining Inc. was formed on August 27, 2021, through a merger between Good Works Acquisition Corp. (GWAC) and Cipher Mining Technologies Inc[42][43] - Business Focus: The company is an emerging technology company operating in the Bitcoin mining ecosystem in the United States, developing and growing a cryptocurrency mining business specializing in Bitcoin[44] - Operational Buildout: Began deployment of capacity in Q1 2022, with mining operations starting in February 2022 at the partially-owned Alborz Facility in Texas[44] - Control: As of September 30, 2022, Bitfury Top HoldCo beneficially owned approximately 81.6% of the Company's common stock, granting the Bitfury Group control[45] - Liquidity and Capital Resources (in millions) * Used $8.9 of cash for operations during the nine months ended September 30, 2022[46] * Cash and cash equivalents: $28.1 as of September 30, 2022[46] * Total stockholders' equity: $383.1 as of September 30, 2022[47] * Accumulated deficit: $59.6 as of September 30, 2022[47] * Paid $184.1 in deposits for miners and mining equipment during the nine months ended September 30, 2022[51] * Management believes existing resources, potential equipment order delays, projected cash/crypto inflows, and potential stock sales will be sufficient for at least 12 months[46][47][51] - COVID-19 Impact: The pandemic has caused economic dislocation and increased volatility in the cryptocurrency space, potentially leading to supply delays, construction delays, and adverse effects on business operations[54][55] NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the key accounting policies used in preparing the unaudited condensed consolidated financial statements, including the basis of presentation, use of estimates, principles of consolidation, and specific policies for investments in equity investees, property and equipment, leases, cryptocurrencies, derivative accounting, and income per share - Basis of Presentation: Financial statements are prepared in accordance with GAAP for interim financial information and SEC regulations[56][61] - Consolidation: Includes accounts of the Company and its controlled subsidiary, Cipher Mining Technologies, with all intercompany transactions eliminated[59] - Use of Estimates: Management makes significant judgments and estimates, particularly for equity instruments, derivative and warrant valuations, useful lives of assets, and deferred tax assets[60] - Fiscal Year Change: Assumed GWAC's financial calendar, with the fiscal year ending December 31, approved on September 23, 2021[63] - Investment in Equity Investees: Accounts for investments using the equity method when significant influence (20-50% ownership) exists, initially at cost or fair value upon derecognition of nonfinancial assets[64] Property and Equipment, Net (in thousands) | Category | Sep 30, 2022 | Dec 31, 2021 | | :----------------------------- | :----------- | :----------- | | Construction-in-progress | $40,192 | $5,069 | | Total cost of property and equipment | $40,767 | $5,129 | | Less: accumulated depreciation | $(16) | $(5) | | Property and equipment, net | $40,751 | $5,124 | - Leases: Accounts for leases under ASC 842, recognizing ROU assets and lease liabilities for terms exceeding 12 months, using the incremental borrowing rate[73][74] - Cryptocurrencies: Accounted for as indefinite-lived intangible assets, assessed for impairment annually or more frequently. Impairment losses are recognized when carrying amount exceeds fair value (lowest intra-day market price) * Impairment charges: $0.3 million (Q3 2022) and $0.9 million (YTD Sep 30, 2022)[81][111] - Derivative Accounting (Luminant Power Agreement): The Luminant Power Agreement is treated as a derivative under ASC 815 due to net settlement capability, recorded at fair value with changes recognized in the statements of operations * Sold $1.7 million in electricity during Q3 2022[87][88] Antidilutive Shares Excluded (September 30, 2022) | Category | Shares | | :----------------------------- | :----------- | | Public Warrants | 8,499,980 | | Private Placement Warrants | 114,000 | | Unvested RSUs | 15,364,457 | | Total | 23,978,437 | NOTE 3. FAIR VALUE MEASUREMENTS This note details the fair value measurements of the company's financial assets and liabilities, categorizing them into Level 1, 2, and 3 inputs, with a focus on the derivative asset from the Luminant Power Agreement and the warrant liability Fair Value Hierarchy (September 30, 2022, in thousands) | Category | Level 1 | Level 2 | Level 3 | Total | | :----------------------------- | :------ | :------ | :------ | :------ | | Money market securities | $11,111 | $- | $- | $11,111 | | Derivative asset | $- | $- | $78,880 | $78,880 | | Total Assets | $11,111 | $- | $78,880 | $89,991 | | Warrant liability | $- | $- | $22 | $22 | | Total Liabilities | $- | $- | $22 | $22 | - Level 3 Derivative Asset * Related to the Luminant Power Agreement, effective July 1, 2022[102] * Fair value derived from Level 2 and Level 3 inputs (unobservable inputs due to lack of quoted prices)[102] * Discount rates used: 7.19% (July 1, 2022) and 7.39% (September 30, 2022)[103] * Balance as of September 30, 2022: $78,880 thousand[102] * Proceeds from reduction of scheduled power (August Amendment): $(5,056) thousand[103] * Change in fair value: $326 thousand[103] - Level 3 Warrant Liability * Private Placement Warrants are classified as Level 3[104] * Valuation uses Black-Scholes option-pricing model and Common Stock quoted price[104] * Key Assumptions (September 30, 2022) * Risk-free rate: 4.08%[107] * Volatility: 78.2%[107] * Contractual term: 3.9 years[107] * Exercise price: $11.50[107] * Balance as of September 30, 2022: $22 thousand (down from $137 thousand on Jan 1, 2022)[104] NOTE 4. PREPAID EXPENSES AND ACCRUED EXPENSES This note provides a breakdown of the company's prepaid expenses and other current assets, primarily related to prepaid insurance, and its accrued expenses, which significantly increased due to taxes - Prepaid Expenses and Other Current Assets (in thousands) * September 30, 2022: $8,300 (primarily prepaid insurance)[108] * December 31, 2021: $13,800 (primarily prepaid insurance)[108] Accrued Expenses (in thousands) | Category | Sep 30, 2022 | Dec 31, 2021 | | :----------------------------- | :----------- | :----------- | | Taxes (primarily sales tax) | $9,895 | $- | | Legal | $389 | $100 | | Accounting and audit | $238 | $153 | | Other | $204 | $4 | | Total accrued expenses | $10,726 | $257 | NOTE 5. CRYPTOCURRENCIES This note details the company's cryptocurrency holdings, primarily Bitcoin, and the related activities including receipts from equity investees, sales, and impairment charges Cryptocurrency Activity (Nine Months Ended Sep 30, 2022, in thousands) | Activity | Amount | | :-------------------------------- | :------- | | Balance, December 31, 2021 | $- | | Cryptocurrencies received from equity investees | $3,139 | | Proceeds from sale of cryptocurrencies | $(23) | | Realized gain on sale of cryptocurrencies | $6 | | Impairment of cryptocurrencies | $(859) | | Balance, September 30, 2022 | $2,263 | - Fair Market Value: Bitcoin fair market value as of September 30, 2022, was approximately $2.4 million, estimated using the closing price (Level 1 input)[110] - Impairment Charges: Recognized $0.3 million for the three months and $0.9 million for the nine months ended September 30, 2022[111] NOTE 6. DEPOSITS ON EQUIPMENT This note outlines the company's significant commitments for purchasing mining equipment, including agreements with Bitmain and SuperAcme, and deposits paid, along with reclassifications to equity investments - Outstanding Purchase Agreements (as of Sep 30, 2022) * 27,000 Antminer S19j Pro (100 TH/s) miners from Bitmain Technologies Limited[114] * 60,000 MicroBT M30S, M30S+ and M30S++ miners from SuperAcme Technology (Hong Kong) Limited[116] * 240 units of BlockBox air-cooled containers (BBACs) from Bitfury USA Inc[114] Purchase Commitments and Deposits (in thousands) | Vendor | Open Purchase Commitment | Deposits Paid | Expected Shipping | | :-------------------------------- | :----------------------- | :------------ | :-------------------------------- | | Bitmain Technologies Limited | $55,500 | $55,500 | Oct 2022 - Dec 2022 | | SuperAcme Technology (Hong Kong) | $222,401 | $101,819 | Oct 2022 - Dec 2022 | | Bitfury USA and other vendors | $57,173 | $42,715 | 2022 | | Total | $335,074 | $200,033 | | - Equipment Contributions to Alborz Facility * Contributed equipment with a total cost of $93.2 million (12,953 miners and other equipment)[119] * Reclassified from deposits on equipment to investment in equity investee[119] * Recognized losses of $11.6 million (June 2022) and $7.2 million (July 2022) related to these contributions[119] NOTE 7. SECURITY DEPOSITS This note details the company's security deposits, primarily related to power purchase and sale agreements with Luminant and an office lease Security Deposits (in thousands) | Category | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------------- | :----------- | :----------- | | Luminant Power Purchase Agreement Independent Collateral Amount | $6,277 | $6,277 | | Luminant Purchase and Sale Agreement collateral | $3,063 | $3,063 | | Office lease security deposit | $960 | $922 | | Other deposits | $1,155 | $90 | | Total security deposits | $11,455 | $10,352 | NOTE 8. INVESTMENT IN EQUITY INVESTEES This note describes the company's equity investments, primarily through the WindHQ Joint Venture Agreement for Data Centers, and the accounting treatment for its 49% ownership in LLCs like Alborz and Bear, including recognized losses on miner contributions - WindHQ Joint Venture Agreement * Signed June 10, 2021, for construction, buildout, deployment, and operation of Data Centers in the U.S[123] * Cipher and WindHQ each own 49% and 51% respectively, of Initial Data Center LLCs[129] * Cipher's 49% ownership in individual Data Center LLCs is accounted for under the equity method[129] - Alborz LLC and Bear LLC * Alborz LLC Agreement entered January 28, 2022; Bear LLC Agreement entered May 16, 2022[132] * Cipher recognized $1.9 million and $2.6 million as equity in the net loss of Alborz LLC for the three and nine months ended September 30, 2022, respectively[133] * Cryptocurrency mining operations had not commenced at the Bear Facility as of September 30, 2022[133] - Miner Contributions to Alborz Facility * Contributed 6,629 miners (June 2022) and 2,375 miners (July 2022)[134] * Recognized losses of $7.2 million (Q3 2022) and $18.8 million (YTD Sep 30, 2022) due to fair value being lower than cost[134] Investment in Equity Investee Activity (Nine Months Ended Sep 30, 2022, in thousands) | Activity | Amount | | :-------------------------------- | :------- | | Balance, December 31, 2021 | $- | | Cost of miners and mining equipment contributed, net of losses | $74,384 | | Sales taxes to be paid by Cipher on behalf of equity investee | $5,316 | | Accretion of basis difference | $821 | | Capital distributions | $(43,291) | | Cryptocurrencies received from equity investee | $(3,139) | | Equity in net loss of equity investee | $(2,574) | | Balance, September 30, 2022 | $31,690 | NOTE 9. RELATED PARTY TRANSACTIONS This note details transactions and agreements with related parties, primarily Bitfury Top HoldCo and its affiliates, including a waiver agreement for stock transfer restrictions, the Master Services and Supply Agreement, and various purchase commitments and payables - Waiver Agreement (April 8, 2022) * Permitted Stockholders (including Bitfury Top HoldCo) to pledge or hypothecate Lock-up Shares as collateral for loans[136] * Extended Lock-up Period by three months to November 26, 2023, for pledged shares[137] * Resulted in the cancellation of 2,890,173 shares of Common Stock held by Bitfury Top HoldCo as consideration for a $10.0 million deposit for mining rigs[140] - Board Observer Agreement (April 8, 2022): Granted Bitfury Holding and Bitfury Top HoldCo the right to designate a representative as a Board observer[141] - Master Services and Supply Agreement (August 26, 2021) * Initial term of 84 months, with automatic 12-month renewals[142] * Cipher can request equipment and services (construction, engineering, operations) from Bitfury Top HoldCo for mining centers[143] * Pricing framework: "onsite" services at cost +5%, "remote services" on a ratchet basis ($1,000/MW up to 445MW, $450/MW above 445MW)[143] - Purchase Commitments and Related Party Payables * Paid $21.7 million to Bitfury USA for BBACs during the nine months ended September 30, 2022[144] * Deposits on equipment related to Bitfury USA agreements: $21.9 million (Sep 30, 2022) and $5.1 million (Dec 31, 2021)[145] * Construction-in-progress related to Bitfury USA agreements: $2.7 million (Sep 30, 2022)[148] * Total balance owed to Bitfury USA (accounts payable, related party): $3.2 million as of September 30, 2022[148] - Related Party Receivables: Approximately $0.7 million as of September 30, 2022, for expenses paid on behalf of Data Center LLCs[150] NOTE 10. LEASES This note details the company's operating lease for office space, including rent expense, ROU assets, lease liabilities, and future minimum lease payments - Office Lease: Initial term of 64 months, commenced February 1, 2022[151] - Rent Expense (in thousands) * Three months ended September 30, 2022: $0.4 million[152] * Nine months ended September 30, 2022: $1.0 million[152] - Supplemental Lease Information (Nine Months Ended Sep 30, 2022) * Operating cash flows - operating leases: $395 thousand[153] * Right-of-use assets obtained in exchange for operating lease liabilities: $5,859 thousand[153] * Weighted-average remaining lease term: 4.7 years[153] * Weighted-average discount rate: 10.9%[153] NOTE 11. COMMITMENTS AND CONTINGENCIES This note addresses the company's legal proceedings, indemnification commitments, and significant contractual obligations, including the Standard Power Hosting Agreement and the Luminant Lease and Purchase and Sale Agreements for its Odessa Facility - Legal Proceedings: Not a party to any material legal proceedings[154] - Indemnification Commitments: Enters into contracts that contain a variety of indemnifications; maximum exposure unknown, no significant losses anticipated[157] - Standard Power Hosting Agreement (Feb 3, 2021) * Company provides Bitcoin miners; Standard Power hosts, operates, and manages them at three Ohio facilities[158] * Company pays hosting and operational service fees, effective pro rata based on miners in operation[161] * Term: five years with automatic five-year renewals[161] - Luminant Lease and Purchase and Sale Agreements (Combined Luminant Lease Agreement) * Leases land for the Odessa Facility and involves the purchase and sale of Interconnection Electrical Facilities (substation)[162] * Requires $12.6 million in collateral (Independent Collateral Amount) for the Luminant Power Agreement; $6.3 million paid as of Sep 1, 2021[163] * Provided an additional $3.1 million collateral under the Purchase and Sale Agreement[166] * Financing for land and substation provided by Luminant affiliates, with $13.1 million in undiscounted principal payments over five years[167] NOTE 12. STOCKHOLDERS' EQUITY This note details the company's authorized and outstanding common stock, including share repurchases for tax withholding and the cancellation of shares related to a deposit, as well as the filing of a shelf registration statement and an at-the-market offering agreement - Authorized Shares (as of Sep 30, 2022) * 500,000,000 shares of Common Stock ($0.001 par value)[169] * 10,000,000 shares of preferred stock[169] - Common Stock Transactions * Repurchased 13,193 shares (Q3 2022) and 672,424 shares (YTD Sep 30, 2022) for RSU tax withholding[171] * Cancelled 2,890,173 shares held by Bitfury Top HoldCo as consideration for a $10.0 million deposit[172] - Shelf Registration Statement (Form S-3) * Filed September 21, 2022, declared effective October 6, 2022[173] * Covers offer and sale of up to $500.0 million in securities by the company[173] * Covers offer and sale from time to time by selling securityholders of up to 23,265,565 shares of Common Stock and 85,500 warrants[173] * Covers shares issuable upon exercise of 8,499,978 public warrants and 114,000 private placement warrants[173] - At-The-Market Offering Agreement (Sales Agreement) * Entered with H.C. Wainwright & Co., LLC on September 21, 2022[174] * Allows sale of up to $250.0 million in Common Stock through the Agent[174] * Company pays Agent a commission of up to 3.0% of gross proceeds[174] * No shares sold under this agreement as of the issuance date[174] NOTE 13. WARRANTS This note describes the Public and Private Placement Warrants assumed by the company upon the Business Combination, outlining their exercise terms and potential adjustments - Warrants Assumed: Public Warrants and Private Placement Warrants assumed upon Business Combination[177] - Exercise Terms: Entitle holder to purchase one share of Common Stock at an exercise price of $11.50 per share[177] - Outstanding Warrants (as of Closing Date) * Public Warrants: 8,500,000[177] * Private Placement Warrants: 114,000[177] - Adjustments: Exercise price and number of shares may be adjusted for stock dividends, extraordinary dividends, recapitalization, reorganization, merger, or consolidation, but not for issuances below exercise price[177] - Settlement: Company not required to net cash settle the warrants[177] NOTE 14. SHARE-BASED COMPENSATION This note details the company's share-based compensation under the Incentive Award Plan, including the types of awards granted (Service-Based and Performance-Based RSUs), recognized expenses, and vesting schedules - Incentive Award Plan: Approved upon Business Combination, allows grants of stock options, SARs, RSUs, and other awards to employees, consultants, and directors[178] - Shares Available * Initially 19,869,312 shares; increased by 7,478,382 shares on January 1, 2022[179] * As of September 30, 2022: 1,638,142 shares available[179] Total Share-Based Compensation Expense (in thousands) | Category | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2022 | | :----------------------------- | :------------------------------ | :----------------------------- | | Service-Based RSUs | $7,078 | $19,936 | | Performance-Based RSUs | $3,416 | $10,136 | | Total | $10,494 | $30,072 | - Service-Based RSUs (Nine Months Ended Sep 30, 2022) * Unvested at Jan 1, 2022: 6,798,238 shares (WA Grant Date Fair Value: $8.04)[181] * Granted: 9,108,086 shares (WA Grant Date Fair Value: $1.90)[181] * Vested: (1,802,123) shares[181] * Unvested at Sep 30, 2022: 13,899,153 shares (WA Grant Date Fair Value: $4.10)[182] * Unrecognized compensation expense: $35.5 million, expected over 1.8 years[182] * Vesting generally in equal installments over 3-4 years, with full vesting upon termination without cause, death, permanent disability, or change in control[185] - Performance-Based RSUs * Unvested at Sep 30, 2022: 4,257,710 shares (WA Grant Date Fair Value: $7.76)[186] * Unrecognized compensation expense: $21.2 million, expected over 1.7 years[187] * One-third vest upon achieving market capitalization milestones ($5B, $7.5B, $10B) over a 30-day period, subject to CEO's continuous service[187] NOTE 15. SUBSEQUENT EVENTS This note outlines significant events that occurred after September 30, 2022, including the formation of Chief Mountain LLC, miner contributions to new facilities, a supplementary agreement with SuperAcme, payments to vendors on behalf of Bitfury, and an ongoing dispute with Luminant regarding power payments - Chief LLC Agreement (Effective Oct 7, 2022): Entered with Chief Interests DC LLC (WindHQ subsidiary) for the construction, operation, and management of the Chief Facility in Texas[188] - Miner Contributions to Bear and Chief Facilities (Oct 2022) * Contributed approximately 6,500 miners[189] * Expected to record a loss of approximately $15 million due to fair value being lower than cost[189] - SuperAcme Supplementary Agreement (Nov 4, 2022) * Establishes new fixed and floating price terms for remaining M30S, M30S+, and M30S++ miners[190] * Company not obligated to send further money to SuperAcme[190] * SuperAcme delivered 17,833 miners (approx. $53.6 million value); company paid $101.8 million in advance[190] * Remaining $48.2 million balance will be applied to future miner purchases[190] - Payments on behalf of Bitfury (After Sep 30, 2022) * Paid approximately $2.1 million directly to Paradigm for BBAC manufacturing services[191] * Company's obligations to Bitfury USA under Master Services and Supply Agreement reduced by the same amount[193] - Luminant Power Agreement Dispute (Oct 26, 2022) * Luminant disputed $1.7 million in payments for electricity sales (July-Aug 2022) and a $5.1 million payment for ramp-up schedule modification (Sep 2022)[194] * Company wholly disputes Luminant's claims and is in discussions to resolve disagreements[195] * Company has not received payment from Luminant for electricity sold in Sep and Oct 2022[196] * Luminant requested the remaining half of the $12.6 million Independent Collateral Amount, expected to be delivered by end of November 2022[196] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and operational results, highlighting its Bitcoin mining business buildout, the impact of the Business Combination, recent developments, and a detailed comparison of financial performance for the reported periods. It also discusses liquidity, capital resources, and critical accounting policies - Business Overview: Cipher Mining is an emerging technology company focused on Bitcoin mining in the U.S., aiming to be a leading operator through large-scale operations, best-in-class technology, and favorable power/hosting arrangements[200][205] - Operational Milestones * Began mining operations at Alborz Facility in February 2022[201] * Alborz Facility capable of ~1.3 EH/s (Cipher owns ~0.64 EH/s)[202] * Bear and Chief Facilities completed in October 2022, expected to generate ~0.65 EH/s (Cipher owns ~0.32 EH/s)[203] * Plan to deploy ~267MW electrical power capacity across four sites by early 2023, with ~8.0 EH/s total hashrate (Cipher expects to own ~7.0 EH/s)[204] * Expected average electricity cost: ~2.7 c/kWh for at least five years[204] - Business Combination (August 27, 2021): Resulted in cash proceeds, net of issuance costs, of approximately $384.9 million[212] - Recent Developments (Post Sep 30, 2022) * Chief LLC Agreement for Chief Facility in Texas[218] * Contributed ~6,500 miners to Bear and Chief Facilities in October 2022, expecting a ~ $15 million loss[219] * Supplementary Agreement with SuperAcme (Nov 4, 2022) for new miner pricing terms; remaining $48.2 million advance payment to be applied to purchases[220] * Paid $13.1 million to Paradigm for BBACs, reducing obligations to Bitfury USA[221] * Dispute with Luminant over $1.7 million in electricity payments and $5.1 million modification payment[222] * Luminant requested remaining half of Independent Collateral Amount[223][224] - Comparative Results (Three Months Ended September 30) * No revenue generated in 2022 or 2021[231] * General and administrative expenses: $17.8 million (2022) vs. $2.3 million (2021)[234] * Share-based compensation: $10.5 million (2022)[235] * Change in fair value of derivative asset: increased operating income by $85.7 million (2022)[234] * Equity in loss of equity investment: $8.3 million (2022), including $7.2 million loss on miner contributions[235] * Impairment of cryptocurrencies: $0.3 million (2022)[235] - Comparative Results (Nine Months Ended September 30) * No revenue generated in 2022 or 2021[237] * General and administrative expenses: $51.8 million (2022) vs. $2.9 million (2021)[240] * Share-based compensation: $30.1 million (2022)[241] * Change in fair value of derivative asset: increased operating income by $85.7 million (2022)[240] * Equity in loss of equity investment: $20.6 million (2022), including $18.8 million loss on miner contributions[241] * Impairment of cryptocurrencies: $0.9 million (2022)[241] - Liquidity and Capital Resources * Negative cash flows from operations: $8.9 million (nine months ended Sep 30, 2022)[245] * Cash and cash equivalents: $28.1 million (Sep 30, 2022)[245] * Paid $184.1 million in deposits on equipment (nine months ended Sep 30, 2022)[247] * Management believes existing resources, potential delays, crypto inflows, and potential stock sales (via $250M at-the-market offering) will be sufficient for 12 months[247] Non-GAAP Financial Measures (Nine Months Ended Sep 30, 2022, in thousands) | Metric | GAAP | Non-GAAP | | :-------------------------------- | :----------- | :----------- | | Operating income (loss) | $12,353 | $(41,485) | | Net income (loss) | $12,574 | $(41,149) | | Basic and diluted net income (loss) per share | $0.05 | $(0.17) | Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Cipher Mining Inc. is not required to provide quantitative and qualitative disclosures about market risk under this item - The company is a smaller reporting company and is not required to provide this information[294] Item 4. Controls and Procedures Management, including the principal executive and financial officers, evaluated the effectiveness of the company's disclosure controls and procedures as of September 30, 2022, concluding they were effective at a reasonable assurance level. No material changes in internal control over financial reporting occurred during the quarter - Effectiveness of Disclosure Controls: Management concluded that disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2022[296] - Changes in Internal Control: No material changes in internal control over financial reporting during the quarter ended September 30, 2022[297] PART II. OTHER INFORMATION Item 1. Legal Proceedings Cipher Mining Inc. is not currently a party to any material pending legal proceedings, though it may encounter various claims in the ordinary course of business - The company is not a party to any material pending legal proceedings[300] - May be subject to legal proceedings and claims arising in the ordinary course of business[300] Item 1A. Risk Factors This section updates previously disclosed risk factors, specifically highlighting an ongoing dispute with Luminant regarding payments under the Luminant Power Agreement, which could divert management's attention and adversely affect the business - Luminant Power Agreement Dispute: Luminant disputed $1.7 million in electricity payments (July-Aug 2022) and a $5.1 million payment for ramp-up schedule modification (Sep 2022)[302] - Company's Stance: Cipher Mining Inc. wholly disputes Luminant's claims and is engaged in discussions to resolve disagreements, including whether Luminant's obligations should be tied to ERCOT's interconnection approval[303] - Unresolved Status: The company does not know how or when this dispute will be resolved[303] - Collateral Request: Luminant requested the remaining half of the Independent Collateral Amount, which the company expects to deliver by end of November 2022[303] - Potential Impact: Resolution efforts may divert management time and resources, potentially affecting the next quarterly valuation of the Luminant Power Agreement and having a material adverse effect on the business[304] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item states that there were no recent unregistered sales of equity securities and no material change in the expected use of proceeds from the GWAC initial public offering and private placement - No recent unregistered sales of equity securities[305] - No material change in the expected use of net proceeds from the GWAC IPO and private placement[307] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities - No defaults upon senior securities[308] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[310] Item 5. Other Information This item is not applicable to the company - Not applicable[310] Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including merger agreements, corporate documents, warrant agreements, stock unit grant notices, power purchase agreements, and offering agreements - Includes Agreement and Plan of Merger (8-K, 001-39625, 3/5/2021)[313] - Includes Second Amended and Restated Certificate of Incorporation and Bylaws (8-K, 001-39625, 8/31/2021)[313] - Includes Third Amendment to the Power Purchase Agreement (8-K, 001-39625, 9/1/2022)[313] - Includes At-The-Market Offering Agreement (S-3, 333-267537, 9/21/2022)[313] - Includes Supplementary Agreement of the Framework Agreement on Supply of Blockchain Servers (8-K, 001-39625, 11/7/2022)[313] - Includes various certifications (CEO, CFO) and Inline XBRL documents[314][315] Signatures This section contains the official signatures of the Chief Executive Officer and Chief Financial Officer, certifying the filing of the Quarterly Report on Form 10-Q on behalf of Cipher Mining Inc - Signed by Tyler Page, Chief Executive Officer, on November 14, 2022[320] - Signed by Edward Farrell, Chief Financial Officer, on November 14, 2022[320]