Cipher Mining Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. The filing is for Cipher Mining Inc. (ticker CIFR), an industrial-scale bitcoin miner operating wholly or partly owned data centers in Texas.
Business context and operating scale
Bitcoin mining is the company’s principal revenue-generating activity. Odessa, its wholly owned 207 MW facility, completed its buildout in September 2023. As of October 31, Cipher reported approximately 80,500 miners and 8.2 EH/s of aggregate hashrate capacity; approximately 70,500 miners and 7.2 EH/s were owned by Cipher.
Financial results and liquidity
| Metric | Q3 2023 | Nine months 2023 | Comparable 2022 |
|---|---|---|---|
| Bitcoin-mining revenue | $30.3m | $83.4m | $0 in both periods |
| Cost of revenue | $13.0m | $37.0m | $0 in both periods |
| Net loss (income) | $(17.7)m | $(37.0)m | $59.3m income; $12.6m income |
| Operating cash flow | Not provided in the filing text for the quarter | $32.4m | $(8.9)m |
| Cash and cash equivalents, period end | $3.3m | $11.9m at Dec. 31, 2022 |
Revenue less cost of revenue was $17.3m for Q3 and $46.4m year to date, equivalent to approximate margins of 57% and 56%, respectively, before other operating costs. Operating loss was $18.2m for Q3 and $36.0m for the nine months. General and administrative expense was $23.9m and $62.7m, respectively; depreciation was $16.2m and $42.3m.
At September 30, total assets were $416.5m, total liabilities $73.8m, stockholders’ equity $342.7m and working capital $15.5m. The balance sheet included $13.7m of bitcoin at carrying value (approximately $14.5m fair value). Finance lease liabilities totaled $18.8m; the company reported no drawn borrowings. It had an undrawn secured credit line of up to $10m, collateralized by bitcoin.
Year-to-date investing cash outflow was $40.9m, principally reflecting $33.0m of property and equipment purchases and equipment-related payments. Financing cash outflow was $0.1m. Cash declined $8.6m from year-end 2022.
Material changes and notable items
- Mining revenue began after Odessa started operations in November 2022; accordingly, the 2022 comparison periods had no mining revenue. Cipher mined 1,078 bitcoin in Q3 and 3,138 in the first nine months of 2023.
- The company sold 3,005 bitcoin for approximately $78.7m in proceeds during the first nine months, using sales to support operating needs. It held 538 bitcoin at September 30.
- Q3 2022 income included an $85.7m derivative fair-value gain; the derivative generated a $4.7m gain in Q3 2023 and $13.3m year to date. The Luminant power agreement derivative is valued using significant unobservable inputs, so these gains can be volatile and are not equivalent to cash operating earnings.
- Bitcoin impairment charges were $3.4m in Q3 and $8.1m year to date. Realized gains on bitcoin sales were $2.5m and $10.7m, respectively.
- Year-to-date results included approximately $2.4m from selling expiring Bitmain coupons and a $2.0m accrual for resolving legal claims. An out-of-period adjustment for 2022 power costs and sales increased 2023 operating loss by approximately $0.4m; management said it was not material to either period.
- Cipher issued 3.8m shares through its at-the-market programs for approximately $11.3m net proceeds year to date. The company had 254.6m shares outstanding as of November 6, 2023.
Outlook, risks and subsequent events
Management stated that cash and expected cash and bitcoin inflows, together with the ability to sell bitcoin and access the undrawn credit line, should fund operating and capital requirements for at least 12 months from issuance of the financial statements. This depends in part on mining proceeds and the company’s ability and willingness to sell bitcoin; no specific earnings or production guidance was provided.
- On October 4, Cipher agreed to buy 1.2 EH/s of Bitmain S21 miners for $24.0m, or $16.8m in cash after coupons, with deliveries expected January–June 2024 and payments extending to one year after the final delivery.
- On November 6, Cipher agreed to acquire Black Pearl development-related assets for $7.0m payable in shares, subject to closing conditions. The site has conditional ERCOT approval for up to 300 MW. If the transaction closes as expected, up to $6.3m of collateral may be required; its return is conditional on energizing at least 135 MW by May 15, 2026.
- Risks include bitcoin-price and network volatility, energy prices and availability, ERCOT and Texas concentration, weather and outages, hardware supply and obsolescence, and the need for future capital. Equity financing may dilute shareholders.
- The company reported that disclosure controls were not effective at the reasonable-assurance level as of September 30, due to an unremediated material weakness involving IT general controls, including user access, segregation of duties and change management. Management is pursuing remediation but gave no assurance it will succeed.
- The Luminant dispute was settled in August 2023, with amendments to power and lease agreements. The company said it was not party to material pending legal proceedings at the filing date.
Key facts for investors to verify
- Whether bitcoin-sale proceeds, mining output and power costs can sustain positive operating cash flow while cash on hand remains low.
- How bitcoin prices, network difficulty, electricity-market conditions and the Level 3 Luminant derivative affect reported results and asset values.
- Funding, delivery, operating economics and potential dilution associated with the S21 purchase and Black Pearl development, including collateral and energization conditions.
- Progress in remediating the disclosed material weakness and restoring effective disclosure controls.
- The effects of lease payments, equipment commitments, bitcoin-collateral requirements and any further capital raising on liquidity.