UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number:
(Exact Name of Registrant as Specified in its Charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer |
(Address of principal executive offices) |
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Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of May 6, 2022, the registrant had
Table of Contents
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PART I. |
3 |
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Item 1. |
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4 |
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Condensed Consolidated Statement of Changes in Stockholder Deficit |
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6 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
7 |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
22 |
Item 3. |
32 |
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Item 4. |
32 |
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PART II. |
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Item 1. |
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Item 1A. |
33 |
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Item 2. |
35 |
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Item 3. |
35 |
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Item 4. |
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Item 5. |
35 |
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Item 6. |
36 |
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37 |
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i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (the “Quarterly Report”) contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report may be forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “forecasts,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this Quarterly Report include, but are not limited to statements regarding:
The forward-looking statements in this Quarterly Report are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including, but not limited to, the important factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (the “SEC”) on March 4, 2022 *(the “2021 Form 10-K”), Part II, Item 1A, “Risk Factors” in this Quarterly Report and our future reports filed with the SEC. The forward-looking statements in this Quarterly Report are based upon information available to us as of the date of this Quarterly Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
You should read this Quarterly Report and the documents that we reference in this Quarterly Report and have filed as exhibits to this Quarterly Report with the understanding that our actual future results, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. These forward-looking statements speak only as of the date of this Quarterly Report. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this Quarterly Report, whether as a result of any new information, future events or otherwise.
1
WHERE YOU CAN FIND MORE INFORMATION
Our corporate website address is https://www.ciphermining.com/ (“Corporate Website”). The contents of, or information accessible through, our Corporate Website are not part of this Quarterly Report.
The company maintains a dedicated investor website at https://investors.ciphermining.com/investors (“Investors’ Website”) which is similarly not part of this Quarterly Report. We make our filings with the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports, available free of charge on our Investors’ Website as soon as reasonably practicable after we file such reports with, or furnish such reports to, the SEC.
We may use our Investors’ Website as a distribution channel of material information about the Company including through press releases, investor presentations, sustainability reports, and notices of upcoming events. We intend to utilize our Investors’ Website as a channel of distribution to reach public investors and as a means of disclosing material non-public information for complying with disclosure obligations under Regulation FD.
Any reference to our Corporate Website or Investors’ Website addresses do not constitute incorporation by reference of the information contained on or available through those websites, and you should not consider such information to be a part of this Quarterly Report or any other filings we make with the SEC.
2
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
CIPHER MINING INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except for share and per share amounts)
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March 31, 2022 |
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December 31, 2021 |
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(unaudited) |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
$ |
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$ |
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Prepaid expenses |
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Cryptocurrencies |
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Total current assets |
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Deposits on equipment |
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Property and equipment, net |
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Security deposits |
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Investment in equity investee |
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- |
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Right-of-use asset |
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- |
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Deferred investment costs |
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- |
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Total assets |
$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities |
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Accounts payable |
$ |
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$ |
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Accounts payable, related party |
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- |
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Operating lease liability, current portion |
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- |
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Accrued expenses |
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Total current liabilities |
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Operating lease liability, net of current portion |
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- |
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Warrant liability |
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Total liabilities |
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Stockholders’ equity |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Treasury stock, at par, |
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( |
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( |
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Accumulated deficit |
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( |
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( |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
$ |
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$ |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
3
CIPHER MINING INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except for share and per share amounts)
(unaudited)
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Three Months Ended March 31, 2022 |
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Two Months Ended March 31, 2021 |
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Costs and expenses |
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General and administrative |
$ |
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$ |
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Depreciation |
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- |
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Impairment of cryptocurrencies |
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- |
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Total costs and expenses |
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Operating loss |
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( |
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( |
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Other income |
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Interest income |
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- |
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Change in fair value of warrant liability |
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- |
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Equity in loss of equity investment |
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( |
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- |
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Total other income |
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( |
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- |
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Net loss |
$ |
( |
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$ |
( |
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Basic and diluted net loss per share |
$ |
( |
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$ |
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Basic and diluted weighted average number of shares outstanding |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
4
CIPHER MINING INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands except for share amounts)
(unaudited)
Three Months Ended March 31, 2022
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Common Stock |
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Treasury Stock |
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Shares |
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Amount |
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Additional Paid-in Capital |
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Shares |
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Amount |
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Accumulated Deficit |
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Total Stockholders’ Equity |
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Balance as of December 31, 2021 |
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$ |
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$ |
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( |
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$ |
( |
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$ |
( |
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$ |
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Delivery of common stock underlying restricted stock units, net of shares settled for tax withholding settlement |
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( |
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( |
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( |
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- |
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( |
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Warrants exercised |
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- |
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- |
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- |
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- |
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- |
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- |
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Share-based compensation |
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- |
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- |
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- |
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- |
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- |
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Net loss |
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- |
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- |
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- |
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- |
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- |
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( |
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( |
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Balance as of March 31, 2022 |
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$ |
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$ |
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( |
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$ |
( |
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$ |
( |
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$ |
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Two Months Ended March 31, 2021
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Common Stock |
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Shares |
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Amount |
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Additional Paid-in Capital |
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Accumulated Deficit |
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Total Stockholders’ Deficit |
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Balance as of January 31, 2021 |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
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Net loss |
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- |
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- |
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- |
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( |
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( |
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Balance as of March 31, 2021 |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
5
CIPHER MINING INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
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Three Months Ended March 31, 2022 |
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Two Months Ended March 31, 2021 |
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Cash flows from operating activities |
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Net loss |
$ |
( |
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$ |
( |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation |
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- |
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Amortization of right-of-use assets |
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- |
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Change in fair value of warrant liability |
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( |
) |
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- |
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Share-based compensation |
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- |
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Equity in earnings (loss) of equity investment |
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- |
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Impairment of cryptocurrencies |
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- |
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Changes in assets and liabilities: |
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Prepaid expenses |
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- |
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Security deposits |
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( |
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- |
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Accounts payable |
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Accounts payable, related party |
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- |
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Accrued expenses |
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( |
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Lease liability |
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- |
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Net cash used in operating activities |
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( |
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( |
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Cash flows from investing activities |
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Deposits on equipment |
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( |
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- |
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Purchases of property and equipment |
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( |
) |
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- |
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Net cash used in investing activities |
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( |
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- |
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Cash flows from financing activities |
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Proceeds from borrowings on related party loan |
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- |
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Repurchase of common shares to pay employee withholding taxes |
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( |
) |
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- |
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Net cash (used in) provided by financing activities |
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( |
) |
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Net (decrease) increase in cash and cash equivalents |
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( |
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Cash and cash equivalents, beginning of the period |
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- |
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Cash and cash equivalents, end of the period |
$ |
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$ |
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Supplemental disclosure of cash flow information |
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Cash paid for interest |
$ |
- |
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$ |
- |
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Cash paid for income taxes, net |
$ |
- |
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$ |
- |
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Supplemental disclosure of noncash investing and financing activities |
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Equity method investment acquired for non-cash consideration |
$ |
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$ |
- |
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Right-of-use asset obtained in exchange for operating lease liability |
$ |
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$ |
- |
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Deposits on equipment in accounts payable, related party |
$ |
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$ |
- |
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Property and equipment purchases in accounts payable |
$ |
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$ |
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Property and equipment purchases in accounts payable, related party |
$ |
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$ |
- |
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Investment in equity investee in accrued expenses |
$ |
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$ |
- |
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Cryptocurrencies received from equity method investment |
$ |
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$ |
- |
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Reclassification of deferred investment costs to equity method investment |
$ |
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$ |
- |
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Property and equipment purchases in accrued expenses |
$ |
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$ |
- |
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Deposits on equipment in accounts payable |
$ |
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$ |
- |
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Deferred offering costs included in accrued expenses |
$ |
- |
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$ |
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Deferred offering costs included in accounts payable |
$ |
- |
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$ |
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Deferred investment costs included in accrued expenses |
$ |
- |
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$ |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
6
CIPHER MINING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. ORGANIZATION AND BUSINESS
Organization
On August 27, 2021 (the “Closing Date”), Good Works Acquisition Corp. (“GWAC”), a special purpose acquisition company, consummated the Agreement and Plan of Merger dated as of March 4, 2021 (the “Merger Agreement”), by and among GWAC, Currency Merger Sub, Inc. (“Merger Sub”), a wholly owned direct subsidiary of GWAC, and Cipher Mining Technologies Inc. (“Cipher Mining Technologies”).
Pursuant to the terms of the Merger Agreement, Merger Sub merged with and into Cipher Mining Technologies, the separate corporate existence of Merger Sub ceasing and Cipher Mining Technologies being the surviving corporation and a wholly owned subsidiary of GWAC (the “Merger” and, together with the other transactions contemplated by the Merger Agreement, the “Business Combination”). Following the Business Combination, the combined company was named Cipher Mining Inc. (“Cipher” or the “Company”). The Company comprises all of GWAC’s and Cipher Mining Technologies’ operations.
Business
The Company is an emerging technology company that operates in the Bitcoin mining ecosystem in the United States. Specifically, the Company is developing and growing a cryptocurrency mining business specializing in Bitcoin. As a stand-alone, U.S.-based cryptocurrency mining business, the Company has begun its buildout of cryptocurrency mining sites in the United States that will include both wholly-owned sites and partially-owned sites acquired through investments in joint ventures. The Company began deployment of capacity in the first quarter of 2022, with mining operations beginning at the Alborz facility, located in Texas, in February 2022. See additional information about the Alborz facility in Note 8.
Cipher Mining Technologies was established on January 7, 2021, in Delaware, by Bitfury Top Holdco B.V. and its subsidiaries (“Bitfury Top Holdco” and, with its subsidiaries, the “Bitfury Group”), a global full-service blockchain and technology specialist and one of the leading private infrastructure providers in the blockchain ecosystem. Bitfury Top HoldCo (together with Bitfury Holding B.V., a subsidiary of Bitfury Top HoldCo, and referred to herein as “Bitfury Holding”) beneficially owned approximately
Risks and uncertainties
Liquidity and capital resources and limited business history
The Company incurred a net loss of $
There is limited historical financial information about the Company upon which to base an evaluation of its performance and the Company has not generated any revenues from its business to date. The business is subject to risks inherent in the establishment of a new business enterprise, including limited capital resources, possible delays in the exploration and/or development, and possible cost overruns due to price and cost increases in services. Management of the Company has no current intention of entering into a merger or acquisition within the next 12 months and has a specific business plan and timetable to complete its 12-month plan of operation. The Company is in the process of an active operational buildout and anticipates that additional capital will be required to implement the buildout. The Company may also require additional capital to pursue certain business opportunities or respond to technological
7
CIPHER MINING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
advancements, competitive dynamics or technologies, customer demands, challenges, acquisitions or unforeseen circumstances. Additionally, the Company has incurred and expects to continue to incur significant costs related to becoming a public company. Accordingly, the Company may engage in equity or debt financings or enter into credit facilities for the above-mentioned or other reasons; however, the Company may not be able to timely secure additional debt or equity financings on favorable terms, if at all. If the Company raises additional funds through equity financing, its existing stockholders could experience significant dilution. Furthermore, any debt financing obtained by the Company in the future could involve restrictive covenants relating to the Company’s capital raising activities and other financial and operational matters, which may make it more difficult for the Company to obtain additional capital and to pursue business opportunities. If the Company is unable to obtain adequate financing on terms that are satisfactory to the Company, when the Company requires it, the Company’s ability to continue to grow or support the business and to respond to business challenges could be significantly limited. If the Company is unable to obtain adequate debt or equity financing for its planned buildout, the Company may be required to delay or change its planned buildout steps, which may adversely affect the Company's business plan.
COVID-19
Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets, including conditions that are outside of our control, such as the outbreak and global spread of the coronavirus (“COVID-19”). The COVID-19 pandemic that was declared on March 11, 2020 has caused significant economic dislocation in the United States and globally as governments, including the United States, introduced measures aimed at preventing the spread of COVID-19. The spread of COVID-19 and the imposition of related public health measures have resulted in, and are expected to continue to result in, increased volatility and uncertainty in the cryptocurrency space. Any severe or prolonged economic downturn, as result of the COVID-19 pandemic or otherwise, could result in a variety of risks to our business and we cannot anticipate all the ways in which the current economic climate and financial market conditions could adversely impact our business.
We may experience disruptions to our business operations resulting from supply interruptions, quarantines, self-isolations, or other movement and restrictions on the ability of our employees or our counterparties to perform their jobs. We may also experience delays in construction and obtaining necessary equipment in a timely fashion. For example, in early January 2022, we had to temporarily shut down the construction at our Alborz site in response to employees being impacted by COVID-19. The temporary shut down was less than a week, and we resumed the construction at the site immediately after. If we are unable to effectively set up and service our miners, our ability to mine Bitcoin will be adversely affected. The future impact of the COVID-19 pandemic is still highly uncertain and there is no assurance that the COVID-19 pandemic or any other pandemic, or other unfavorable global economic, business or political conditions, will not materially and adversely affect our business, prospects, financial condition, and operating results.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and principles of consolidation
The Company prepares its unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) as determined by the FASB and pursuant to the accounting and disclosure rules and regulations of the Securities and Exchange Commission (“SEC”).
The unaudited condensed consolidated financial statements include the accounts of the Company and its controlled subsidiary, Cipher Mining Technologies. All intercompany transactions and balances have been eliminated.
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. The most significant estimates inherent in the preparation of the Company's financial statements include, but are not limited to, those related to equity instruments issued in share-based compensation arrangements, valuation of the warrant liability, useful lives of property and equipment, and the valuation allowance associated with the Company’s deferred tax assets, among others. Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the
8
CIPHER MINING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, actual results could differ significantly from those estimates.
Unaudited interim condensed consolidated financial statements
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, these unaudited interim condensed consolidated financial statements reflect all adjustments, which consist of only normal recurring adjustments necessary for the fair presentation of the balances and results for the periods presented. These unaudited interim condensed consolidated financial statement results are not necessarily indicative of results to be expected for the full fiscal year or any future period.
A description of the Company’s significant accounting policies in included in the Company’s 2021 Form 10-K. You should read the unaudited interim condensed consolidated financial statements in conjunction with the Company’s audited consolidated financial statements and accompanying notes in the Company’s 2021 Form 10-K. Except as disclosed herein, there has been no material change in the information disclosed in the notes to the Company’s audited consolidated financial statements included in the Company’s 2021 Form 10-K.
Change in fiscal year
Cipher Mining Technologies assumed GWAC’s financial calendar for the combined entity with the third fiscal quarter ending September 30 and its fiscal year ending December 31. This change to the fiscal year end was approved by the Company’s board of directors (“Board”) on September 23, 2021. Cipher Mining Technologies’ fiscal year previously ended on January 31.
Investment in equity investee
The Company accounts for investments using the equity method of accounting if the investment provides the Company the ability to exercise significant influence, but not control, over an investee. Significant influence is generally deemed to exist if the Company has an ownership interest in the voting stock of an investee of between
The Company’s investment is subsequently adjusted to recognize the Company’s share of net income or losses as they occur. The Company also adjusts its investment upon receipt of cryptocurrency from the equity investee, which is accounted for as a distribution-in-kind. The Company’s share of investee earnings or losses is recorded, net of taxes, within earnings (losses) of equity method investment in the unaudited condensed consolidated statements of operations. Additionally, the Company’s interest in the net assets of its equity method investee is reflected in the unaudited condensed consolidated balance sheets. If, upon the contribution of nonfinancial assets to the joint venture from Cipher, there is any difference between the cost of the investment and the amount of the underlying equity in the net assets of an investee, the difference is required to be accounted for as if the investee were a consolidated subsidiary. If the difference is assigned to depreciable or amortizable assets or liabilities, then the difference should be amortized or accreted in connection with the equity earnings based on the Company’s proportionate share of the investee’s net income or loss. If the investor is unable to relate the difference to specific accounts of the investee, the difference should be considered goodwill.
The Company considers whether the fair value of its equity method investment has declined below its carrying value whenever adverse events or changes in circumstances indicate that recorded values may not be recoverable. If the Company considered any such decline to be other than temporary (based on various factors, including historical financial results, success of the mining operations and the overall health of the investee’s industry), then the Company would record a write-down to estimated fair value.
Property and equipment, net
Property and equipment consists primarily of construction-in-progress at one of the Company’s planned sites in Texas, as well as office and computer equipment, software that is being developed for internal use and several miners obtained for testing purposes. Property and equipment is stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are
9
CIPHER MINING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
calculated using the straight-line method over the estimated useful lives of the assets, which is generally
Property and equipment, net consisted of the following (amounts in thousands):
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March 31, 2022 |
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December 31, 2021 |
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Office and computer equipment |
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$ |
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$ |
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Software |
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- |
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Miners and mining equipment |
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- |
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Construction-in-progress |
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Total cost of property and equipment |
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Less: accumulated depreciation |
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( |
) |
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( |
) |
Property and equipment, net |
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$ |
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$ |
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Depreciation expense was immaterial during the three months ended March 31, 2022 and the two months ended March 31, 2021.
Capitalized software costs
The Company accounts for the costs of software developed for internal use by capitalizing costs incurred during the application development stage to property and equipment, net on the unaudited condensed consolidated balance sheets. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. The Company plans to amortize the capitalized costs of internal-use software on a straight-line basis over the estimated useful life of the asset, which is expected to be
Leases
The Company accounts for leases in accordance with ASC 842, “Leases”. Accordingly, the Company determines whether an arrangement contains a lease at the inception of the arrangement. If a lease is determined to exist, the term of such lease is assessed based on the date on which the underlying asset is made available for the Company’s use by the lessor. The Company’s assessment of the lease term reflects the non-cancelable term of the lease, inclusive of any rent-free periods and/or periods covered by early-termination options which the Company is reasonably certain of not exercising, as well as periods covered by renewal options which the Company is reasonably certain of exercising. The Company also determines lease classification as either operating or finance at lease commencement, which governs the pattern of expense recognition and the presentation reflected in the consolidated statements of operations over the lease term.
A lease liability is recorded on the Company’s consolidated balance sheet at lease commencement reflecting the present value of its fixed minimum payment obligations over the lease term. A corresponding right-of-use (“ROU”) asset equal to the initial lease liability will also be recorded, adjusted for any accrued or prepaid rents and/or unamortized initial direct costs incurred in connection with execution of the lease and reduced by any lease incentives received. For purposes of measuring the present value of its fixed payment obligations for a given lease, the Company uses its incremental borrowing rate, determined based on information available at lease commencement, as rates implicit in its leasing arrangements are typically not readily determinable. The Company's incremental borrowing rate reflects the rate it would pay to borrow on a secured basis and incorporates the term and economic environment of the associated lease. ROU assets will be reviewed for impairment, consistent with other long-lived assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
For the Company’s operating leases, fixed lease payments will be recognized as lease expense on a straight-line basis over the lease term. Variable lease costs are expensed as incurred and are not included in the measurement of ROU assets and lease liabilities.
The Leases standard provides practical expedients for an entity’s ongoing accounting. The Company has elected the practical expedient not to separate lease and non-lease components for all leases, which means all consideration that is fixed, or in-substance fixed, relating to the non-lease components will be captured as part of our lease components for balance sheet purposes.
The Company entered into a series of agreements with affiliates of Luminant ET Services Company LLC (“Luminant”), including the Lease Agreement dated June 29, 2021, with amendment and restatement on July 9, 2021 (as amended and restated, the “Luminant Lease Agreement”). Once the Luminant Lease Agreement is effective and the Company has control over the applicable leased asset,
10
CIPHER MINING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
the Company will record both a ROU asset and a corresponding lease liability in accordance with ASC 842 for each lease component as applicable under the agreements.
Cryptocurrencies
Cryptocurrencies, including Bitcoin, are included in current assets on the consolidated balance sheets. Cryptocurrencies awarded to the Company through its wholly owned mining activities will be accounted for in connection with the Company’s revenue recognition policy disclosed above. Cryptocurrencies awarded to the Company as distributions-in-kind from equity investees are accounted for in accordance with ASC 845, “Nonmonetary Transactions” and recorded at fair value upon receipt.
Cryptocurrencies will be accounted for as intangible assets with indefinite useful lives. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the cryptocurrency at the time its fair value is being measured. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. The Company has elected to bypass the optional qualitative impairment assessment and will track its cryptocurrency activity daily for impairment assessment purposes. The Company determines the fair value of its cryptocurrencies on a nonrecurring basis in accordance with ASC 820, “Fair Value Measurements and Disclosures”, based on quoted prices on the active trading platform that the Company determines is its principal market for Bitcoin (Level 1 input). The Company performs an analysis each day to identify whether events or changes in circumstances, principally decreases in the quoted prices on its active trading platform, indicate that it is more likely than not that its cryptocurrencies are impaired. For impairment testing purposes, daily fair value of the cryptocurrencies is based on the next day’s beginning market price of the cryptocurrency (UTC 00:00), at the single Bitcoin level (one Bitcoin). The excess, if any, of the current carrying amount of the cryptocurrency assets over the daily fair value represents an impairment loss. The total of all daily impairment losses for the given quarter are summed and recorded at the end of the quarter. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted.
Cryptocurrencies awarded to the Company through its mining activities will be included as an adjustment to reconcile net income to cash used in operating activities in the consolidated statements of cash flows. The receipt of cryptocurrency as distributions-in-kind from equity investees and sales, if any, of cryptocurrencies are included within investing activities in the consolidated statements of cash flows and any realized gains or losses from such sales will be included in operating income (loss), net in the consolidated statements of operations. The Company will account for its sale of cryptocurrencies in accordance with the first in first out (“FIFO”) method of accounting.
Recently issued and adopted accounting pronouncements
In December 2019, the FASB issued , “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which is intended to simplify various aspects related to accounting for income taxes. The new guidance removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The Company
In May 2021, the FASB issued ASU 2021-04, “Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40)”. ASU 2021-04 reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. ASU 2021-04 provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses: (1) how an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; (2) how an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. ASU 2021-04 was effective for the Company on January 1, 2022 and there was no impact on the Company’s financial statements or disclosures upon adoption.
11
CIPHER MINING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
No other new accounting pronouncement issued or effective during the fiscal year had or is expected to have a material impact on our consolidated financial statements or disclosures.
NOTE 3. FAIR VALUE MEASUREMENTS
The Company’s financial assets and liabilities subject to fair value measurement on a recurring basis and the level of inputs used for such measurements were as follows (amounts in thousands):
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Fair Value Measured as of March 31, 2022 |
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Level 1 |
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Level 2 |
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Level 3 |
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Total |
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Assets included in: |
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Cash and cash equivalents |
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Money market securities |
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$ |
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$ |
- |
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$ |
- |
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$ |
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$ |
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$ |
- |
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$ |
- |
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$ |
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Liabilities included in: |
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Warrant liability |
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$ |
- |
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$ |
- |
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$ |
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$ |
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$ |
- |
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$ |
- |
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$ |
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$ |
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Fair Value Measured as of December 31, 2021 |
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Level 1 |
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Level 2 |
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Level 3 |
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Total |
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Assets included in: |
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Cash and cash equivalents |
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Money market securities |
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$ |
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$ |
- |
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$ |
- |
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$ |
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$ |
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$ |
- |
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$ |
- |
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$ |
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Liabilities included in: |
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Warrant liability |
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$ |
- |
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$ |
- |
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$ |
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$ |
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$ |
- |
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$ |
- |
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$ |
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$ |
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Fair values of cash and cash equivalents, prepaid expenses, accounts payable and accrued expenses approximate the recorded value due to the short-term nature of these items. The Company’s Private Placement Warrants are classified within Level 3 of the fair value hierarchy because the fair value is based on significant inputs that are unobservable in the market.
The valuation of the Private Placement Warrants uses assumptions and estimates the Company believes would be made by a market participant in making the same valuation. The Company assesses these assumptions and estimates on an on-going basis as additional data impacting the assumptions and estimates are obtained.
The Company engaged a valuation firm to determine the fair value of the Private Placement Warrants using a Black-Scholes option-pricing model and the quoted price of the Company’s Common Stock.
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March 31, 2022 |
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December 31, 2021 |
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Risk-free rate |
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% |
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% |
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Dividend yield rate |
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% |
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% |
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Volatility |
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% |
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% |
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Contractual term (in years) |
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Exercise price |
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$ |
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$ |
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The following table presents changes in the fair value of the Private Placement Warrants for the three months ended March 31, 2022 (amounts in thousands):
Balance, January 1, 2022 |
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$ |
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Change in fair value |
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( |
) |
Balance, March 31, 2022 |
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$ |
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12
CIPHER MINING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 4. PREPAID EXPENSES AND ACCRUED EXPENSES
As of March 31, 2022 and December 31, 2021, the Company had $
The Company’s accrued expenses consisted of the following (amounts in thousands):
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March 31, 2022 |
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December 31, 2021 |
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Legal |
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$ |
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$ |
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Taxes |
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Consulting |
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Accounting and audit |
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Other |
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Total accrued expenses |
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$ |
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$ |
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NOTE 5. CRYPTOCURRENCIES
The following table presents information about the Company’s cryptocurrencies (Bitcoin) (amounts in thousands):
Balance, January 1, 2022 |
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$ |
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Cryptocurrencies received from equity investee |
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Impairment of cryptocurrencies |
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( |
) |
Balance, March 31, 2022 |
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$ |