Cipher Mining Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. The supplied filing is for Cipher Mining Inc., not a company identified in the filing as Cipher Digital Inc. Figures are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context and reporting period
Cipher develops and operates industrial-scale bitcoin mining data centers in Texas. It operates one wholly owned site, Odessa, and three sites through 49%-owned joint ventures. Odessa began mining in November 2022, so the comparable 2022 quarter had no bitcoin mining revenue. At March 31, 2023, Cipher reported 47,123 miners at Odessa; as of April 30, it reported approximately 69,500 miners and 7.0 EH/s across its sites, including joint-venture operations.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Bitcoin mining revenue | $21.895 million | $0 |
| Cost of revenue | $8.141 million | $0 |
| Gross profit before other expenses | $13.754 million; approximately 62.8% gross margin | Not applicable |
| Operating loss | $6.169 million | $17.554 million loss |
| Net loss | $6.601 million; $0.03 per diluted share | $17.499 million; $0.07 per diluted share |
| Cash from operating activities | $10.816 million | $3.321 million used |
| Cash used in investing activities | $18.340 million | $103.973 million |
| Cash and cash equivalents at period end | $3.922 million | $11.927 million at Dec. 31, 2022 |
| Working capital | Approximately $3.2 million | — |
The operating result included a $5.328 million noncash gain from revaluing the Luminant power-agreement derivative, a $4.021 million realized gain on bitcoin sales, and $2.260 million of other gains, primarily from selling Bitmain coupons. Depreciation was $11.655 million, and share-based compensation was $8.810 million. Management also presented non-GAAP net income of $6.414 million; this measure excludes specified items, including depreciation, share-based compensation and gains, and should not be treated as GAAP earnings.
Total assets were $412.685 million and total liabilities $68.065 million at March 31. Liabilities included finance lease obligations of $14.180 million and operating lease obligations of $5.276 million, including current and noncurrent portions; the filing does not report conventional borrowings. Current assets were $36.478 million versus current liabilities of $33.302 million. Bitcoin was carried at $9.576 million, with disclosed fair value of approximately $11.8 million.
Material changes versus the prior comparable period
- Mining revenue began after Odessa commenced operations in November 2022. Cipher mined 943 bitcoin in Q1 2023 at an average reported price of $22,740 per bitcoin.
- Net loss narrowed by $10.898 million year over year, while operating cash flow improved by $14.137 million. Cash nevertheless declined by $8.005 million during the quarter, primarily as investing outflows exceeded operating cash generation.
- Investing cash outflow fell to $18.340 million from $103.973 million, reflecting much lower equipment deposits, partly offset by continued construction spending. Property and equipment, net, rose to $263.027 million from $191.784 million at year-end.
- Cipher sold 939 bitcoin for approximately $21.0 million of proceeds to support operations; it held 416 bitcoin at quarter-end.
Outlook, risks and unusual items
- Management expected ongoing Odessa construction capital expenditures in the first half of 2023 to exceed financial resources on hand at March 31. It nevertheless believed cash and expected cash and bitcoin inflows, including bitcoin sales, would fund operating and capital requirements for at least 12 months from issuance of the statements.
- On May 4, 2023, Cipher agreed to buy 11,000 Canaan miners for delivery in Q3 2023, expecting to fund the purchase from operations, including bitcoin sales. Management anticipated approximately 80,500 miners and 8.2 EH/s by the end of Q3 2023.
- The Luminant power-agreement derivative was a Level 3 fair-value asset of $72.030 million. Its valuation depends partly on unobservable assumptions, and changes in power-market forward prices can materially affect reported results. The $5.328 million quarterly gain was noncash.
- A $0.4 million net adverse out-of-period adjustment was recorded in Q1 for 2022 Odessa power costs and sales. Management concluded it was not material to either period’s financial statements.
- Luminant sued Cipher Mining Technologies Inc. seeking repayment of $6.8 million in prior payments and disputing amounts connected with the Odessa project. Cipher denied liability and intends to contest the case; no accrual was recorded because the outcome was not considered probable or estimable.
- Disclosure controls and procedures were deemed ineffective at March 31. The filing reports a previously identified material weakness in IT general controls involving user access, segregation of duties and change management; remediation was ongoing and not yet demonstrated to be effective.
- Key risks include bitcoin price and network conditions, power prices and availability, Texas concentration, severe weather, equipment supply and obsolescence, and the possibility that additional financing may be needed. Management cautioned that actual results may differ materially from its forward-looking statements.
Most important facts for investors to verify
- Whether operating cash and bitcoin sales can support Odessa completion, ongoing expenses and the 11,000-miner purchase, given only $3.922 million of cash at quarter-end.
- Actual miner deployment, hashrate, electricity usage and unit economics versus the company’s stated Q3 2023 targets.
- The Luminant derivative’s valuation assumptions and the status and potential financial impact of the Luminant litigation.
- Progress and testing of controls remediation, especially given the ineffective disclosure controls conclusion.
- How recurring operating performance compares with results affected by bitcoin-sale gains, derivative remeasurement, coupon-sale proceeds and the disclosed out-of-period adjustment.