Cipher Mining Inc. — Q2 2023 Form 10-Q
Entity note: The supplied filing is for Cipher Mining Inc. (Nasdaq: CIFR), not Cipher Digital Inc. It covers the quarter and six months ended June 30, 2023; financial statements are unaudited. Amounts below are in U.S. dollars unless noted.
Business context and reporting period
Cipher develops and operates bitcoin-mining data centers in Texas. At quarter-end it reported 61,024 miners at its wholly owned Odessa facility, alongside miners at three partially owned joint-venture sites. Bitcoin mining was its principal revenue-generating activity. Operations at Odessa began in November 2022, so the prior-year comparable periods had no bitcoin-mining revenue.
Key financial metrics
| Metric | Three months ended June 30, 2023 | Six months ended June 30, 2023 |
|---|---|---|
| Bitcoin-mining revenue | $31.2 million | $53.1 million |
| Cost of revenue | $15.9 million | $24.0 million |
| Approximate gross profit and margin | $15.4 million; 49% | $29.1 million; 55% |
| Operating loss | $11.6 million | $17.8 million |
| Net loss | $12.7 million | $19.3 million |
| GAAP diluted loss per share | $0.05 | $0.08 |
| Operating cash flow | Not provided for the quarter | $24.7 million provided |
The gross profit estimates are revenue less reported cost of revenue; power-sale proceeds are presented separately in the filing. The company reported Q2 non-GAAP net income of $7.3 million, versus a GAAP net loss, after excluding specified items including depreciation, share-based compensation, and derivative fair-value changes. These non-GAAP measures are company-defined and are not substitutes for GAAP results.
At June 30, cash and cash equivalents were $1.7 million, working capital was approximately $3.6 million, total assets were $416.7 million, total liabilities were $73.5 million, and stockholders’ equity was $343.2 million. Accumulated deficit was $130.5 million. The filing reports finance and operating lease liabilities, but no conventional debt balance is clearly identified. Cash declined by $10.2 million over the six months to $1.7 million.
Investing cash outflow was $34.4 million and financing cash outflow was $0.4 million for the six months. The company sold 2,063 bitcoin for approximately $52.5 million of proceeds; bitcoin holdings were 404 bitcoin with a reported carrying amount of $10.5 million and estimated fair value of approximately $12.3 million at quarter-end.
Material changes versus prior comparable periods
- Q2 revenue was $31.2 million and first-half revenue was $53.1 million, compared with none in the 2022 periods, as Odessa began operating in late 2022.
- First-half net loss narrowed to $19.3 million from $46.7 million. Operating loss narrowed to $17.8 million from $46.9 million.
- Depreciation rose to $26.1 million for the first half from an immaterial amount as mining equipment and Odessa infrastructure entered service. First-half general and administrative expense increased to $38.8 million from $34.1 million.
- Operating cash flow improved to $24.7 million from a $9.9 million use in the first half of 2022. Bitcoin sales were an important source of cash; investment outflows fell substantially from the prior-year buildout period.
- Equity-method losses from joint ventures were $2.2 million for the first half, down from $12.2 million, although Cipher’s share of mining-operation losses increased as all three sites were operational.
Outlook, risks, contingencies, and unusual items
- Operating outlook: Management expected approximately 80,500 miners and 8.2 EH/s of capacity across its sites by the end of Q3 2023, including approximately 70,500 company-owned miners and 7.2 EH/s. As of July 31, it reported approximately 76,322 miners and 7.8 EH/s. Management intended to continue building out Odessa to full capacity.
- Liquidity outlook: Management said existing resources, projected cash and bitcoin inflows, and the ability and intent to sell bitcoin were expected to cover operating and capital requirements for at least 12 months from issuance of the statements. This depends in part on mining operations and bitcoin sales; quarter-end cash was only $1.7 million.
- Equipment payments and financing: All 11,000 Canaan miners had been delivered and installed, but title was to transfer only after installment payments through November 2023. The company expected to fund payments from operations, including bitcoin sales. An August 2023 at-the-market agreement authorized up to $250 million of gross share sales, with agent commissions of up to 3%; use could dilute shareholders.
- Power-market exposure: The Luminant power agreement produced $5.7 million of power-sale proceeds in the first half and a $8.6 million noncash fair-value gain. The derivative asset was a Level 3 valuation, totaling approximately $75.3 million, and its value is sensitive to electricity-market assumptions.
- Legal matter: Luminant’s suit seeks recovery of payments totaling $6.8 million related to the Odessa project and power sales. Cipher disputes the claims and accrued $2.0 million for resolution costs. The filing says the matter’s outcome and timing were uncertain.
- Reporting adjustment: First-half cost of revenue and power sales included out-of-period adjustments of approximately $2.0 million and $1.6 million, respectively, relating to 2022 Odessa power activity. Management concluded the error was not material to either period.
- Controls: Management concluded disclosure controls were not effective at June 30, 2023, citing an unremediated material weakness in IT general controls involving user access, segregation of duties, and change management.
- Principal risks: Bitcoin-price volatility, mining difficulty and competition, electricity prices and availability, Texas concentration and severe weather, equipment supply and obsolescence, regulatory restrictions, capital needs, and potential shareholder dilution.
Important facts for investors to verify
- Whether management’s expected capacity ramp and Odessa buildout were achieved, and the associated equipment and power costs.
- Cash generation and liquidity after quarter-end, including bitcoin sold, retained, or received and payments due under the Canaan and lease arrangements.
- Actual use and pricing of the $250 million ATM authorization, including resulting dilution.
- Developments and any additional accruals or payments related to the Luminant litigation.
- Changes in the Level 3 power-agreement derivative valuation and the assumptions underlying it.
- Progress in remediating the IT-control material weakness and whether controls were subsequently tested and found effective.
- Reconciliation of bitcoin mining economics across revenue, cost of revenue, power sales, bitcoin impairments, and non-GAAP adjustments.