Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report, as well as our audited consolidated financial statements and related notes as disclosed in our 2021 Form 10-K. This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the “Risk Factors” sections of our 2021 Form 10-K and this Quarterly Report and other factors set forth in other parts of this Quarterly Report.
Unless the context otherwise requires, references in this Quarterly Report to the “Company,” “Cipher,” “we,” “us” or “our” refer to Cipher Mining Technologies Inc., prior to the consummation of the Business Combination (the “Closing” and, such date of the consummation of the Business Combination, the “Closing Date”) and to Cipher Mining Inc. and its consolidated subsidiaries following the Business Combination. References to “GWAC” or “Good Works” refer to our predecessor company prior to the consummation of the Business Combination.
Overview
We are an emerging technology company that operates in the Bitcoin mining ecosystem in the United States. Specifically, we are developing and growing a cryptocurrency mining business specializing in Bitcoin. Our key mission is to become a leading Bitcoin mining company in the United States.
As a stand-alone, U.S.-based cryptocurrency mining business, we have begun our 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. We began deployment of capacity in the first quarter of 2022, with mining operations beginning at the partially-owned Alborz Facility in February 2022.
In connection with our planned buildout, we entered into the Standard Power Hosting Agreement, the WindHQ Joint Venture Agreement and the Luminant Power Agreement, all of which, together, are expected to cover at least four sites where we expect to begin our buildout. Pursuant to these agreements, we expect to have access, for at least five years, to an average cost of electricity of approximately 2.7 c/kWh. We expect that this will help competitively position us to achieve our goal of becoming a leading Bitcoin mining operator in the United States.
In August 2022, we completed installation of the last mining rigs to be delivered to the Alborz Facility. With that the Alborz Facility is capable of generating approximately 1.3 EH/s, of which we own approximately 0.64 EH/s under the WindHQ Joint Venture Agreement. In October 2022, we also completed the Bear Facility and Chief Facility, which, combined, are expected to generate approximately 0.65 EH/s, of which we own approximately 0.32 EH/s.
By early 2023, we plan to deploy approximately 267MW of electrical power capacity across four sites with a corresponding hashrate of approximately 8.0 EH/s, of which we expect to own approximately 7.0 EH/s.
We aim to deploy the computing power that we will create to mine Bitcoin and validate transactions on the Bitcoin network. We believe that Cipher will become an important player in the Bitcoin network due to our planned large-scale operations, best-in-class technology, market-leading power and hosting arrangements and a seasoned, dedicated senior management team.
As of September 30, 2022, Bitfury Top HoldCo B.V. (“Bitfury Top HoldCo”) (together with Bitfury Holding B.V., a subsidiary of Bitfury Top HoldCo, and referred to herein as “Bitfury Holding”) beneficially owns approximately 81.6% of our common stock, $0.001 par value per share (“Common Stock”), with sole voting and sole dispositive power over those shares and, as a result, Bitfury Top HoldCo has the power to elect all of our directors and we are a “controlled company” under Nasdaq corporate governance standards. For additional information, see “Risk Factors—Risks Related to our Common Stock and Warrants—We are a “controlled company” within the meaning of Nasdaq listing rules and, as a result, can rely on exemptions from certain corporate governance requirements that provide protection to shareholders of other companies” in our 2021 Form 10-K.
The Business Combination
On August 27, 2021, as contemplated by the Agreement and Plan of Merger dated as of March 4, 2021 (the “Merger Agreement”), by and among Good Works Acquisition Corp. (“GWAC”), a Delaware corporation, Currency Merger Sub, Inc. (“Merger Sub”), a Delaware corporation and a wholly‑owned direct subsidiary of GWAC, and the Company, the parties entered into the business combination transaction pursuant to which Merger Sub merged with and into the Company, the separate corporate existence of Merger Sub ceasing and the Company 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
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Combination, the combined company was named Cipher Mining Inc. (“Cipher Mining”). Cipher Mining comprises all of GWAC’s and Cipher Mining Technologies’ operations.
Upon the consummation of the Business Combination, all holders of Cipher Common Stock received shares of our Common Stock of $10.00 per share after giving effect to the Exchange Ratio, resulting in 200,000,000 shares of our Common Stock to be immediately issued and outstanding to Bitfury Top HoldCo (in addition to 8,146,119 shares of our Common Stock held by GWAC), 32,235,000 shares of our Common Stock held by the PIPE Investors and 6,000,000 shares of our Common Stock received by Bitfury Holding B.V., an affiliate of Bitfury Top HoldCo, under the Bitfury Private Placement, based on the following events contemplated by the Merger Agreement:
•the cancellation of each issued and outstanding share of Cipher Common Stock; and
•the conversion into the right to receive a number of shares of our Common Stock based upon the Exchange Ratio.
In connection with the execution of the Merger Agreement, GWAC entered into: (i) the PIPE Subscription Agreements to sell to certain investors (the “PIPE Investors”), an aggregate of 32,235,000 shares of GWAC Common Stock, immediately following the Closing, for a purchase price of $10.00 per share and at an aggregate gross proceeds of $322.4 million (the “PIPE Financing”) and (ii) the Bitfury Subscription Agreement to sell to Bitfury Top HoldCo (or an affiliate of Bitfury Top HoldCo), an aggregate of 6,000,000 shares of GWAC Common Stock, following the Closing, for a purchase price of $10.00 per share and Bitfury Top HoldCo’s payment in cash and/or forgiveness of outstanding indebtedness for aggregate gross proceeds of $60.0 million (the “Bitfury Private Placement”).
Upon the consummation of the Business Combination, GWAC Common Stock and GWAC Warrants ceased trading on the Nasdaq Stock Exchange (the “Nasdaq”), and our Common Stock and Public Warrants began trading on August 30, 2021 on the Nasdaq under the ticker symbols “CIFR” and “CIFRW,” respectively. The Business Combination resulted in cash proceeds, net of issuance costs, of approximately $384.9 million.
On April 8, 2022, we, as successor-in-interest to GWAC, and Cipher Mining Technologies, with respect to certain sections (collectively, the “Company”), entered into a Waiver Agreement, with Bitfury Top HoldCo (the “Waiver Agreement”), pursuant to which we waived certain restrictions on transfer of shares under (a) that certain Lock-up Agreement, dated as of August 26, 2021, by and between Good Works Acquisition Corp. and Bitfury and (b) those certain Lock-up Agreements, dated as of August 26, 2021, by and between Good Works Acquisition Corp. and each of (i) I-B Goodworks, LLC, (ii) Magnetar Financial LLC, (iii) Mint Tower Capital Management B.V., (iv) Periscope Capital, Inc. and (v) Polar Asset Management Partners Inc., respectively (the stockholders contemplated by clauses (a)-(b), the “Stockholders”) imposing similar restrictions on the Stockholders (collectively, the “Lock-up Agreements” and each a “Lock-up Agreement”). The Waiver Agreement was negotiated and approved by an independent committee of our Board of Directors (the “Board”). The Waiver Agreement permits each Stockholder to pledge or otherwise hypothecate up to one hundred percent (100%) of the Lock-up Shares (as defined in the Lock-Up Agreements) held by such Stockholder as of the date of the Waiver Agreement (the shares that are actually pledged or otherwise hypothecated, the “Pledged Shares”) as collateral or security in connection with any loan meeting certain criteria set forth in the Waiver Agreement and (ii) transfer the Pledged Shares upon foreclosure by such pledgee in accordance with the terms of the applicable pledge or hypothecation; provided that the Waiver will only apply and be effective if the following conditions are satisfied or waived: (i) any pledgee executes a joinder to the Lock-up Agreements and therefore be bound by the Transfer Restrictions as defined in the Lock-up Agreements, (ii) the pledgee in receipt of any pledged shares be in compliance with all Anti-Money Laundering and Know Your Customer laws and regulations in effect in the United States of America and be a nationally, internationally or regionally recognized bank or bona fide financial institution, private equity fund or other lender, (iii) any pledgee not be a competitor of the Company, and (iv) any loan for pledged shares be a bona fide loan containing customary market terms and have an initial 25% maximum loan-to-value ratio. Additionally, effective as of the date of consummation of any pledge or hypothecation, and solely in regard to any Pledged Shares, the Lock-Up Period, as defined in the applicable Lock-up Agreement, shall be extended an additional three months to November 26, 2023. Furthermore, the Waiver Agreement provides for a cancellation of 2,890,173 shares of our Common Stock held by Bitfury Top HoldCo and subject to the Lock-up Agreements (the “Cancelled Shares”) as consideration for the $10.0 million deposit paid by us for Bitfury mining rigs under our agreement dated October 11, 2021, for which no order confirmation was made. The Cancelled Shares were part of the tranche of Lock-Up Shares with a Lock-Up Period during the period beginning on the date that is eighteen months after the Closing Date and ending on the date that is two years after the Closing Date.
Also on April 8, 2022, we entered into an Observer Agreement (the “Board Observer Agreement”) with Bitfury Holding and Bitfury Top HoldCo (together with “Bitfury Holding,” the “Investors”), which provides that the Investors have the right to designate a representative to serve as an observer (the “Observer”) of our Board and any committees thereof (subject to exceptions specified therein). The Observer has the right to attend and observe meetings of the Board, including any meetings of the committees of the Board, and to participate in discussions of matters brought to the Board or any committee thereof, in each case, subject to certain exceptions specified in the Board Observer Agreement. The Investors’ rights under the Board Observer Agreement will terminate
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upon the date that the Investors no longer beneficially own at least 10% of the outstanding shares of our Common Stock. As of the date of this Quarterly Report, the Investors have not designated an Observer pursuant to the Board Observer Agreement.
The Board Observer Agreement was negotiated and approved by an independent committee of the Board.
Recent Developments
Effective October 7, 2022, in connection with the WindHQ Joint Venture Agreement, Cipher Mining Technologies and Chief Interests DC LLC, a subsidiary of WindHQ LLC (“WindHQ”), as members, entered into the Limited Liability Company Agreement of Chief Mountain LLC (the “Chief LLC Agreement”). The Chief LLC Agreement delineates the rights and obligations of the members related to the construction, operation and management of the Chief facility, located in Texas (the “Chief Facility”). Similar to the Alborz Facility and the Bear Facility, we are also required to support and monitor (remotely) the operations of the hardware at the Chief Facility (particularly the mining servers) under the WindHQ Joint Venture Agreement.
In October 2022, we contributed approximately 6,500 miners to the Bear Facility and the Chief Facility. While the final quantities of miners going to each respective site, and therefore the relative pricing as between the two sites, is still being finalized, the estimated fair value of the relevant miners was lower than the cost paid by us to purchase them; therefore, we expect to record a loss related to the contribution of these miners of approximately $15 million.
On November 4, 2022, through our subsidiary, Cipher Mining Technologies, we entered into a supplementary agreement of the Framework Agreement on Supply of Blockchain Servers (the “Supplementary Agreement”) with SuperAcme Technology (Hong Kong) Limited (“SuperAcme”), which supplements the Amended SuperAcme Agreement dated May 6, 2022, and the Original SuperAcme Agreement. The Supplementary Agreement establishes new fixed and floating price terms for remaining purchases of M30S, M30S+ and M30S++ miners and provides that we will not be obligated to send any further money to SuperAcme. In connection with the Amended SuperAcme Agreement, SuperAcme has delivered 17,833 miners to date, at an aggregate value of approximately $53.6 million, and we have paid aggregate advance payments of $101.8 million. The remaining balance of $48.2 million will be applied to the purchase of miners under the new fixed and floating price terms set forth in the Supplementary Agreement.
We are in discussions with Bitfury USA Inc. (“Bitfury USA”) to assign Cipher Mining Technologies certain service contracts related to the production of BlockBox air-cooled containers (each a “BBAC”) originally entered into between Bitfury USA and Paradigm Controls of Texas, LLC (“Paradigm”). Going forward, we will continue to work directly with Paradigm or other vendors on any remaining BBACs that would have been purchased from Bitfury USA under the Master Services and Supply Agreement. In connection with these discussions, as of November 11, 2022, we have paid a total of $13.1 million to Paradigm and our obligations to Bitfury USA under the Master Services and Supply Agreement were reduced by the same amount.
On October 26, 2022, we received a letter from Luminant ET Services Company LLC (“Luminant”), disputing: (i) the payments of $1.7 million that Luminant had made to us under the Luminant Power Agreement for the electricity sold in the ERCOT market during July 2022 and August 2022 and (ii) the payment of $5.1 million made to us by Luminant in September 2022 in consideration for the modification to the ramp up schedule pursuant to the August Amendment (as defined below) to the Luminant Power Agreement. We received and recorded $1.7 million as part of the change in fair value of derivative asset in the condensed consolidated statements of operations for the three and nine months ended September 30, 2022. We received and recorded $5.1 million as a reduction to the derivative asset on the condensed consolidated balance sheet during the three months ended September 30, 2022. We have not received payment from Luminant for electricity sold in the ERCOT market in September 2022 and October 2022.
We wholly dispute the claims made by Luminant and have been engaged in discussions with Luminant in an attempt to reach a mutually agreeable solution and resolve disagreements between the parties regarding these payments and whether the commencement of Luminant’s obligations under the Luminant Power Agreement should be tied to ERCOT’s interconnection approval. At this time we do not know how or when this dispute will be resolved.
On November 8, 2022, we also received a letter from Luminant requesting we deposit to Luminant the remaining half of the Independent Collateral Amount under the Luminant Power Agreement. We expect to deliver to Luminant the remaining half of the Independent Collateral Amount before the end of November 2022.
For further information, see Note 15 to our unaudited condensed consolidated financial statements.
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Known Trends or Future Events
Impact of COVID-19 and Other Economic, Business and Political Conditions
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 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 a 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 construction at the Alborz Facility in response to employees being impacted by COVID-19. The temporary shutdown 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.
Change in Fiscal Year
Starting with the three and eight months ended September 30, 2021, we assumed GWAC’s financial calendar for our third fiscal quarter ending September 30 and our fiscal year ending December 31. This change to the fiscal year end was approved by the Board on September 23, 2021. Cipher Mining Technologies’ fiscal year previously ended on January 31.
Results of Operations
Since our inception on January 7, 2021 and until the time of the Business Combination, our activities were primarily organizational and those necessary to prepare for the Business Combination. Following the Business Combination, our activities have been focused on the set-up of cryptocurrency mining data centers as part of our planned buildout, including entry into agreements with Bitmain, SuperAcme and Bitfury Top HoldCo and its subsidiaries (together the “Bitfury Group”) for supply of miners and other equipment and services. For further details, see “—Contractual Obligations and Other Commitments.” We expect to incur increased expenses as a result of being a public company (for legal, financial reporting, accounting and auditing compliance). Our plan of operation for the next 12 months is to commence and maintain Bitcoin mining operations across our four sites and to continue developing our initial portfolio comprised of select sites in the United States.
Comparative Results for the Three Months Ended September 30, 2022 and 2021
We generated no revenue during the three months ended September 30, 2022 and 2021. We incurred general and administrative expenses of $17.8 million and $2.3 million during the three months ended September 30, 2022 and 2021, respectively. Share-based compensation costs of $10.5 million were recognized in total general and administrative expenses during the three months ended September 30, 2022, related to restricted stock units (“RSUs”), awarded to our employees. The remaining $7.3 million of general and administrative expenses incurred during the three months ended September 30, 2022 was recognized predominantly as follows: $2.4 million for business insurance, $1.4 million for payroll and payroll-related benefits for employees, $0.8 million for accounting and audit services, $0.5 million for each of consulting fees and legal expenses, $0.4 million for rent expense at the Company’s headquarters, $0.3 million for information technology (“IT”) and related IT security expenses, and $0.2 million each for the following: travel expenses, office supplies and software expenses mainly for licenses, board fees, and specific costs of operating as a public company. Certain costs such as accounting, legal and public company costs were higher during the three months ended September 30, 2022 as compared to the same period in 2021 due to our Registration Statement filed in September 2022. See additional information above in “—Recent Developments” or in “—Liquidity and Capital Resources” below.
Comparatively, general and administrative expenses recognized during the three months ended September 30, 2021 were mainly related to $1.6 million for business insurance, compensation and benefits of approximately $0.3 million, as well as approximately $0.1 million for each of the following: accounting and audit expenses, investor relations and specific costs of operating as a public company.
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Change in the fair value of derivative asset increased operating income by $85.7 million during the three months ended September 30, 2022, which was primarily due to recording an $83.6 million derivative asset related to the Luminant Power Agreement on July 1, 2022.
Equity in loss of equity investment totaled $8.3 million for the three months ended September 30, 2022 and consisted of: a loss of $7.2 million related to our contribution of miners to Alborz LLC in July 2022 with fair values at the time of the contribution that were less than the costs we paid to acquire the miners; $1.9 million for our share of the loss of Alborz LLC for the three months ended September 30, 2022; and $0.8 million for accretion of the basis differences that resulted from our contributions of miners at a loss in both June and July 2022. Additionally, we recognized $0.3 million for impairment during the three months ended September 30, 2022 on Bitcoin that we received from Alborz LLC.
We paid $27.3 million for deposits on miners and mining equipment during the three months ended September 30, 2022, bringing total deposits on equipment on our unaudited condensed consolidated balance sheet to approximately $200.0 million as of September 30, 2022, after removing the miners and mining equipment contributed to Alborz LLC. Additionally, during the three months ended September 30, 2022, we paid approximately $15.9 million for purchases of property and equipment, which was principally related to construction-in-progress at our wholly-owned site in Odessa, Texas (the “Odessa Facility”), which is under development.
Comparative Results for the Nine Months Ended September 30, 2022 and the Eight Months Ended September 30, 2021
We generated no revenue during the nine months ended September 30, 2022 or during the eight months ended September 30, 2021. We incurred general and administrative expenses of $51.8 million and $2.9 million during the nine months ended September 30, 2022 and the eight months ended September 30, 2021, respectively. Share-based compensation costs of $30.1 million were recognized in total general and administrative expenses during the nine months ended September 30, 2022, related to RSUs awarded to our employees and directors. The remaining $21.7 million of general and administrative expenses incurred during the nine months ended September 30, 2022 was recognized predominantly as follows: $7.3 million for business insurance, $3.0 million for payroll and payroll-related benefits for employees, $2.0 million for taxes, $2.0 million for legal expenses, $1.8 million for accounting and audit services, $1.2 million for consulting expenses, $1.0 million for rent expense at the Company’s headquarters, $0.7 million for board fees, $0.5 million for specific costs of operating as a public company, and $0.5 million each for travel expenses and also for office supplies and software, as well as $0.4 million for recruiting fees. Certain costs such as accounting, legal and public company costs were higher during the nine months ended September 30, 2022 as compared to the eight months ended September 30, 2021 due to our Registration Statement filed in September 2022. See additional information above in “—Recent Developments” or in “—Liquidity and Capital Resources” below.
On March 15, 2022, we formed the Special Independent Committee to review, consider, deliberate, investigate, analyze, explore, evaluate, monitor and exercise general oversight of any and all activities of the Company directly or indirectly involving entry into the Waiver Agreement and the Observer Agreement. For more information about the Special Independent Committee, the Waiver and the Observer Agreements, see Note 9 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report. Our legal expenses during the nine months ended September 30, 2022 totaled over $2.0 million and the expenses related to the Special Independent Committee and legal and advisory expenses related to entry into the Waiver Agreement and the Observer Agreement are included in our total legal expenses during this period.
Comparatively, general and administrative expenses recognized during the eight months ended September 30, 2021 were mainly related to $1.6 million of business insurance costs, compensation and benefits of approximately $0.6 million, as well as $0.3 million for accounting and audit expenses, $0.2 million for investor relations and approximately $0.1 million for each of the following: consulting expenses and specific costs of operating as a public company.
Change in the fair value of derivative asset increased operating income by $85.7 million during the three months ended September 30, 2022, which was primarily due to recording an $83.6 million derivative asset related to the Luminant Power Agreement on July 1, 2022.
Equity in loss of equity investment totaled $20.6 million for the nine months ended September 30, 2022 and consisted of: losses of $18.8 million related to our contribution of miners to Alborz LLC in June and July 2022 with fair values at the time of the contribution that were less than the costs we paid to acquire the miners; $2.6 million for our share of the loss of Alborz LLC for the nine months ended September 30, 2022; and $0.8 million for accretion of the basis differences that resulted from our contributions of miners at a loss in both June and July 2022. Additionally, we recognized $0.9 million of impairment during the nine months ended September 30, 2022 on Bitcoin that we received from Alborz LLC.
We paid $184.1 million for deposits on miners and mining equipment during the nine months ended September 30, 2022, increasing total deposits on equipment on our unaudited condensed consolidated balance sheet to approximately $200.0 million as of
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September 30, 2022, after removing the miners and mining equipment contributed to Alborz LLC. Additionally, during this period we also paid $29.0 million for purchases of property and equipment, which was principally related to construction-in-progress at our Odessa Facility, which is under development.
Factors Expected to Affect Our Future Results
There have been no material changes to the “Factors Expected to Affect Our Future Results” in the Management’s Discussion and Analysis section of our 2021 Form 10-K. Our financial position and results of operations depend to a significant extent on those factors.
Liquidity and Capital Resources
We had negative cash flows from operations of $8.9 million for the nine months ended September 30, 2022. As of September 30, 2022, we had cash and cash equivalents of $28.1 million, total stockholders’ equity of $383.1 million and an accumulated deficit of $59.6 million. To date, we have relied in large part on proceeds from the consummation of the Business Combination to fund our operations. During the nine months ended September 30, 2022, we paid $184.1 million as deposits on equipment, primarily for miners, and had additional future commitments related to these deposits as detailed below under “—Contractual Obligations and Other Commitments.” See “—Recent Developments” for additional information regarding the Supplementary Agreement with SuperAcme. Our management believes that our existing financial resources, combined with the ability to delay certain equipment orders, projected cash and cryptocurrencies inflows from our sites, the ability to sell cryptocurrency received or earned, as well as potential sales of Common Stock under our shelf registration statement on Form S-3 (see additional information below), will be sufficient to meet its operating and capital requirements for at least 12 months from the date these unaudited condensed consolidated financial statements are issued.
On September 21, 2022, we filed with the Securities and Exchange Commission a shelf registration statement on Form S-3, which was declared effective on October 6, 2022 (the “Registration Statement”). The Registration Statement covers: (i) the offer and sale by us, from time to time in one or more offering, securities having an aggregate public offering price of up to $500.0 million, (ii) the offer and sale from time to time by the selling securityholders identified therein of up to 23,265,565 shares of our Common Stock and the offer and sale from time to time by the selling securityholders of up to 85,500 of our warrants and (iii) the offer and sale of (A) up to 8,499,978 shares of Common Stock that are issuable by us upon the exercise of 8,499,978 public warrants that were previously registered and (B) up to 114,000 shares of Common Stock that are issuable by us upon the exercise of 114,000 private placement warrants.
In connection with the filing of the Registration Statement, we also entered into an at-the-market offering agreement (the “Sales Agreement”) with H.C. Wainwright & Co., LLC (the “Agent”), under which we may, from time to time, sell shares of our Common Stock having an aggregate offering price of up to $250.0 million in “at-the-market” offerings through the Agent, which is included in the $500.0 million of securities that may be offered pursuant to the Registration Statement. Sales of the shares of Common Stock, if any, will be made at prevailing market prices at the time of sale, or as otherwise agreed with the Agent. Pursuant to the Sales Agreement, we will pay the Agent a commission of up to 3.0% of the gross proceeds from the sale of any shares of Common Stock under the Sales Agreement. We are not obligated to make any sales of shares of its Common Stock under the Sales Agreement. We have not sold any shares of our Common Stock under the Sales Agreement as of the issuance of these unaudited condensed consolidated financial statements.
Cash Flows
The following table summarizes our sources and uses of cash (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Eight Months Ended |
|
|
|
September 30, 2022 |
|
|
September 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 |
|
Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2022 was $8.9 million, resulting from net income of $12.6 million, less non-cash income items of $85.8 million, consisting primarily of change in the fair value of derivative asset of $85.7 million and change in the fair value of our warrant liability of $0.1 million; partially offset by non-cash expense items of $52.1 million, which includes share-based compensation expense of $30.1 million, equity in loss of equity investment of $20.6 million
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(which is mainly comprised of the losses on our June and July 2022 contributions of equipment of $18.8 million), cryptocurrency impairment of $0.9 million and amortization of $0.5 million. The change in assets and liabilities of $12.2 million consisted primarily of a decrease in prepaid and other current assets of $5.4 million primarily for insurance costs, proceeds from reduction of scheduled power of $5.1 million, proceeds from electricity sales of $1.7 million, increases in accrued expenses of $1.4 million and increases in accounts payable of $0.4 million, partially offset by a $1.1 increase in security deposits mainly due to a bond covering the shipment of miners and a $0.7 million increase in related party receivables related to amounts that we will be reimbursed for by the Alborz LLC.
Net cash used in operating activities for the five months ended September 30, 2021 was approximately $27.1 million, resulting from a net loss of $3.1 million, an increase in prepaid expenses and other current assets of $14.9 million that was primarily due to business insurance, increased security deposits of $9.4 million and a combined increase in accounts payable and accrued expenses totaling $0.2 million.
Investing Activities
Net cash used in investing activities during the nine months ended September 30, 2022 was $169.8 million, primarily related to $184.1 million for deposits for miners and mining equipment and $29.0 million for purchases of property and equipment primarily related to construction-in-progress at the Odessa Facility; partially offset by cash distributions of $43.3 million from the Alborz LLC.
Net cash used in investing activities during the eight months ended September 30, 2022 was $74.5 million and consisted mainly of $74.3 million for deposits on equipment.
Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2022 was $3.1 million, which was used to repurchase shares to cover the tax obligations of employees resulting from the vesting of RSUs.
Net cash provided by financing activities for the eight months ended September 30, 2021 was $383.9 million and represented the cash proceeds received in connection with the Business Combination, net of issuance costs.
Limited Business History; Need for Additional Capital
There is limited historical financial information about the Company upon which to base an evaluation of our performance. Our business is subject to risks inherent in the establishment of a new business enterprise, including limited capital resources, possible delays in exploration and/or development, and possible cost overruns due to price and cost increases in services. We have no current intention of entering into a merger or acquisition within the next 12 months and we have a specific business plan and timetable to complete our 12-month plan of operation. We are in the process of an active operational buildout and anticipate that additional capital will be required to implement the buildout. See also “—Liquidity and Capital Resources.” We may also require additional capital to pursue certain business opportunities or respond to technological advancements, competitive dynamics or technologies, customer demands, challenges, acquisitions or unforeseen circumstances. Additionally, we have incurred and expect to continue to incur significant costs related to becoming a public company. Accordingly, we may engage in equity or debt financings or enter into credit facilities for the above-mentioned or other reasons; however, we may not be able to timely secure additional debt or equity financings on favorable terms, if at all. If we raise additional funds through equity financing, our existing stockholders could experience significant dilution. Furthermore, any debt financing obtained by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. If we are unable to obtain adequate financing on terms that are satisfactory to us, when we require it, our ability to continue to grow or support the business and to respond to business challenges could be significantly limited and we may be required to delay or change our planned buildout, which may adversely affect our business plan. For risks associated with this, see “Risks Factors—Risks Related to Our Business, Industry and Operations—We will need to raise additional capital, which may not be available on terms acceptable to us, or at all” in our 2021 Form 10-K.
Contractual Obligations and Other Commitments
We have a lease agreement for executive office space, with an effective term that commenced on February 1, 2022 and monthly rent payments of approximately $0.1 million commencing on June 1, 2022. The initial lease term is for a period of five years and four months.
33
Mining and Mining Equipment
As of September 30, 2022, we had the following contractual obligations and other commitments for miners and other mining equipment (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendor |
|
Agreement Dates |
|
Original Maximum Purchase Commitment* |
|
|
Open Purchase Commitment |
|
|
Deposits Paid |
|
|
Expected Shipping for Open Purchase Commitments |
Bitmain Technologies Limited** |
|
August 20, 2021 and August 30, 2021 |
|
$ |
171,135 |
|
|
$ |
55,500 |
|
|
$ |
55,500 |
|
|
October 2022 - December 2022 |
SuperAcme Technology (Hong Kong)**/*** |
|
May 6, 2022 |
|
|
222,401 |
|
|
|
222,401 |
|
|
|
101,819 |
|
|
October 2022 - December 2022 |
Bitfury USA and other vendors (primarily for BBACs)**** |
|
Various |
|
|
|
|
|
57,173 |
|
|
|
42,715 |
|
|
|
Total |
|
|
|
|
|
|
$ |
335,074 |
|
|
$ |
200,033 |
|
|
|
__________
* Maximum purchase commitment does not consider discounts that we may qualify for with the respective vendors, which could reduce the total cost of the miners.
** Pursuant to our agreements with Bitmain and SuperAcme, we are responsible for all logistics costs related to transportation, packaging for transportation and insurance related to the delivery of the miners.
*** See “—Recent Developments” above and discussion below this table for additional information regarding the Supplementary Agreement with SuperAcme.
****See “—Recent Developments” for additional information regarding payments for BBACs.
On August 20, 2021 and on August 30, 2021, we and Bitmain Technologies Limited (“Bitmain”) entered into a Non-Fixed Price Sales and Purchase Agreement and a Supplemental Agreement to Non-Fixed Price Sales and Purchase Agreement, respectively, (together, the “Bitmain Agreement”) for us to purchase 27,000 Antminer S19j Pro (100 TH/s) miners, which were expected to be delivered in nine batches on a monthly basis between January 2022 and September 2022. As of September 30, 2022, 12,953 miners have been received. The original purchase price under the Bitmain Agreement was $171.1 million (the “Total Purchase Price”) with (i) 25% of the Total Purchase Price due paid within five days of execution of the Bitmain Agreement, (ii) 35% of the purchase price of each batch due five months prior to each delivery, and (iii) the remaining 40% of the purchase price of each batch due 15 days prior to each delivery. As of September 30, 2022, we had paid total deposits of $134.2 million for the miners (some of which are no longer reflected in the table above due to their receipt and deployment during the nine months ended September 30, 2022), and we do not expect to make any further payments to Bitmain to receive the rest of the miners.
On September 2, 2021, we entered into the Original SuperAcme Agreement to purchase 60,000 MicroBT M30S, M30S+ and M30S++ miners, which were expected to be delivered in six batches on a monthly basis between July 2022 and December 2022. On May 6, 2022, we entered into the Amended SuperAcme Agreement, which established a new delivery quantity ratio of miners as well as new fixed subtotal pricing. In connection with the Original SuperAcme Agreement, we previously paid an initial deposit of $22.2 million. No additional initial deposit was required as a result of the execution of the Amended SuperAcme Agreement. On November 4, 2022, through Cipher Mining Technologies we entered into the Supplementary Agreement with SuperAcme, which supplements the Amended SuperAcme Agreement and the Original SuperAcme Agreement. The Supplementary Agreement establishes new fixed and floating price terms for remaining purchases of M30S, M30S+ and M30S++ miners and provides that we will not be obligated to send any further money to SuperAcme. In connection with the Amended SuperAcme Agreement, SuperAcme has delivered 17,833 miners to date, at an aggregate value of approximately $53.6 million, and we have paid aggregate advance payments of $101.8 million. The remaining balance of $48.2 million will be applied to the purchase of miners under the new fixed and floating price terms set forth in the Supplementary Agreement. Each batch of miners is paid in full prior to delivery.
On October 11, 2021, we entered into an agreement with Bitfury Top HoldCo, made under, and as a part of, the Master Services and Supply Agreement, to purchase a total of between 28,000 to 56,000 mining rigs, to be delivered in seven batches on a monthly basis between June 2022 and December 2022. Generally, under this agreement, we agreed to pay a maximum price of $6,250 per machine, with an advance payment of $10.0 million due on or before the third business day following the execution of the agreement, and advance payments for each monthly batch due thereafter in accordance with the terms of the agreement. The $10.0 million advance payment was paid by us prior to December 31, 2021. The agreement was a non-binding commitment unless and until confirmed by a mutually executed order confirmation. We did not enter into any such order confirmations and, as mentioned above, we executed the Waiver Agreement with Bitfury Top HoldCo in April 2022, which provided for the Cancelled Shares as consideration for the $10.0 million deposit.
34
We also entered into two agreements with Bitfury USA, a subsidiary of Bitfury Top HoldCo, made under, and as a part of, the Master Services and Supply Agreement, to purchase a total of 240 units of BBACs. The delivery of the first 20 containers was received in the first quarter of 2022 and the remainder is expected to be delivered in 2022.
We are also party to several power and hosting arrangements. We expect to deliver to Luminant the remaining half of the Independent Collateral Amount under the Luminant Power Agreement before the end of November 2022.
On May 2, 2022, Alborz LLC, as borrower, entered into a facility and security agreement with BlockFi Lending LLC (“BlockFi”), as lender. Pursuant to this agreement, BlockFi agreed to provide a secured credit facility in the amount of up to approximately $46.9 million, which is available in up to three tranches, maturing on May 2, 2024 (the “BlockFi Facility”) to finance the purchase, installation and operation of Bitmain miners (“Mining Equipment”) at the Alborz Facility. The proceeds from the BlockFi Facility will be used by Alborz LLC to purchase Mining Equipment from us pursuant to that certain contribution agreement entered into between us and Alborz LLC on May 2, 2022 (the “Contribution Agreement”). Pursuant to the Contribution Agreement, Cipher Mining Technologies agreed to acknowledge and consent to the use of the Mining Equipment as well as any digital currency mined using the Mining Equipment as collateral in respect of the BlockFi Facility. Alborz LLC completed all of the three contemplated disbursements under the BlockFi Facility. The principal amount of the loan issued to Alborz LLC is approximately $26.8 million.
Non-GAAP Financial Measures
We are providing supplemental financial measures for (i) non-GAAP loss from operations that excludes the impact of depreciation of fixed assets, stock compensation expense and the non-cash change in fair value of derivative asset and (ii) non-GAAP net loss and non-GAAP diluted loss per share that exclude the impact of depreciation of fixed assets, the non-cash change in fair value of derivative asset, the change in fair value of the warrant liability and stock compensation expense. These supplemental financial measures are not measurements of financial performance under accounting principles generally accepted in the United States (“GAAP”) and, as a result, these supplemental financial measures may not be comparable to similarly titled measures of other companies. Management uses these non-GAAP financial measures internally to help understand, manage, and evaluate our business performance and to help make operating decisions.
We believe that these non-GAAP financial measures are also useful to investors in comparing our performance across reporting periods on a consistent basis. Non-GAAP loss from operations excludes non-cash operational expenses that we believe are not reflective of our general business performance such as (i) depreciation of fixed assets, (ii) the non-cash change in fair value of our derivative asset and (iii) stock compensation expense, which could vary significantly in comparison to other companies.
Non-GAAP net loss and non-GAAP diluted loss per share exclude the impact of (i) depreciation of fixed assets, (ii) change in fair value of warrant liability, (iii) non-cash change in fair value of our derivative asset and (iv) stock compensation expense. We believe the use of these non-GAAP financial measures can also facilitate comparison of our operating results to those of our competitors.
Non-GAAP financial measures are subject to material limitations as they are not in accordance with, or a substitute for, measurements prepared in accordance with GAAP. For example, we expect that share-based compensation expense, which is excluded from the non-GAAP financial measures, will continue to be a significant recurring expense over the coming years and is an important part of the compensation provided to certain employees, officers and directors. Similarly, we expect that depreciation of fixed assets will continue to be a recurring expense over the term of the useful life of the assets. Our non-GAAP financial measures are not meant to be considered in isolation and should be read only in conjunction with our consolidated financial statements included elsewhere in this Quarterly Report, which have been prepared in accordance with GAAP. We rely primarily on such consolidated financial statements to understand, manage and evaluate our business performance and use the non-GAAP financial measures only supplementally.
The following is a reconciliation of our non-GAAP loss from operations, which excludes the impact of (i) depreciation of fixed assets, (ii) non-cash change in fair value of our derivative asset and (iii) stock compensation expense, to its most directly comparable GAAP measure for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended |
|
|
Eight Months Ended |
|
|
|
2022 |
|
|
2021 |
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
Reconciliation of non-GAAP loss from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
59,233 |
|
|
$ |
(2,283 |
) |
|
$ |
12,353 |
|
|
$ |
(2,943 |
) |
Depreciation |
|
|
11 |
|
|
|
- |
|
|
|
26 |
|
|
|
1 |
|
Change in fair value of derivative asset |
|
|
(83,936 |
) |
|
|
- |
|
|
|
(83,936 |
) |
|
|
- |
|
Stock compensation expense |
|
|
10,494 |
|
|
|
- |
|
|
|
30,072 |
|
|
|
- |
|
Non-GAAP loss from operations |
|
$ |
(14,198 |
) |
|
$ |
(2,283 |
) |
|
$ |
(41,485 |
) |
|
$ |
(2,942 |
) |
35
The following are reconciliations of our non-GAAP net loss and non-GAAP basic and diluted net loss per share, in each case excluding the impact of (i) depreciation of fixed assets (ii) non-cash change in fair value of derivative asset, (iii) change in fair value of warrant liability and (iv) stock compensation expense, to the most directly comparable GAAP measures for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended |
|
|
Eight Months Ended |
|
|
|
2022 |
|
|
2021 |
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
Reconciliation of non-GAAP net loss: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
59,292 |
|
|
$ |
(2,421 |
) |
|
$ |
12,574 |
|
|
$ |
(3,082 |
) |
Non-cash adjustments to net income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
11 |
|
|
|
- |
|
|
|
26 |
|
|
|
1 |
|
Change in fair value of derivative asset |
|
|
(83,936 |
) |
|
|
- |
|
|
|
(83,936 |
) |
|
|
- |
|
Change in fair value of warrant liability |
|
|
4 |
|
|
|
(113 |
) |
|
|
115 |
|
|
|
(113 |
) |
Stock compensation expense |
|
|
10,494 |
|
|
|
- |
|
|
|
30,072 |
|
|
|
- |
|
Total non-cash adjustments to net income (loss) |
|
|
(73,427 |
) |
|
|
(113 |
) |
|
|
(53,723 |
) |
|
|
(112 |
) |
Non-GAAP net loss |
|
$ |
(14,135 |
) |
|
$ |
(2,534 |
) |
|
$ |
(41,149 |
) |
|
$ |
(3,194 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of non-GAAP basic and diluted net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per share |
|
$ |
0.24 |
|
|
$ |
(0.01 |
) |
|
$ |
0.05 |
|
|
$ |
(0.01 |
) |
Depreciation of fixed assets (per share) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Change in fair value of derivative asset (per share) |
|
|
(0.34 |
) |
|
|
- |
|
|
|
(0.34 |
) |
|
|
- |
|
Change in fair value of warrant liability (per share) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Stock compensation expense (per share) |
|
|
0.04 |
|
|
|
- |
|
|
|
0.12 |
|
|
|
- |
|
Non-GAAP basic and diluted net loss per share |
|
$ |
(0.06 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.17 |
) |
|
$ |
(0.01 |
) |
Critical Accounting Policies and 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 unaudited condensed consolidated financial statements and the reported amounts of expenses during the reporting period. A description of our significant accounting policies in included in our 2021 Form 10-K. You should read the unaudited condensed consolidated financial statements in conjunction with our audited consolidated financial statements and accompanying notes in our 2021 Form 10-K. Except as disclosed below, there has been no material change in the information disclosed in the notes to our audited consolidated financial statements included in our 2021 Form 10-K.
Cryptocurrencies
Cryptocurrencies, including Bitcoin, are included in current assets on the consolidated balance sheets. Cryptocurrencies received through our wholly-owned mining activities will be accounted for in connection with our revenue recognition policy. Cryptocurrencies awarded to us 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 held are 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. We determine the fair value of our cryptocurrencies on a nonrecurring basis in accordance with ASC 820, Fair Value Measurement, based on the lowest intra-day market price of the cryptocurrency at the single Bitcoin level (one Bitcoin). The excess, if any, represents a recognized impairment loss. 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 us through our 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 proceeds from sales of cryptocurrencies are included within operating activities in the consolidated statements of cash flows and any realized gains or losses from such sales are included in operating income (loss), net in the consolidated statements of operations. The receipt of cryptocurrency as distributions-in-kind from equity investees are included within investing activities in the consolidated statements of cash flows. We account for sales of cryptocurrencies in accordance with the first in first out method of accounting.
36
Investment in equity investee
We account for investments using the equity method of accounting if the investment provides us with the ability to exercise significant influence, but not control, over an investee. Significant influence is generally deemed to exist if we have an ownership interest in the voting stock of an investee of between 20 percent and 50 percent, or an ownership interest greater than three to five percent in certain partnerships, unincorporated joint ventures and limited liability companies, although other factors are considered in determining whether the equity method of accounting is appropriate. Under this method, an investment in the common stock of an investee (including a joint venture) shall be initially measured and recorded at cost.; however, an investor shall initially measure at fair value an investment in the common stock of an investee (including a joint venture) recognized upon the derecognition of a distinct nonfinancial asset at the time that control over the distinct nonfinancial asset is transferred to the equity investee, such as that which occurs upon the transfer of miners and mining equipment to a joint venture from us.
Our investment is subsequently adjusted to recognize our share of net income or losses as they occur. We also adjust our investment upon receipt of cryptocurrency from the equity investee, which is accounted for as a distribution-in-kind. Our share of investee earnings or losses is recorded, net of taxes, within equity in loss of equity investment in the consolidated statements of operations. Additionally, our interest in the net assets of our equity method investee is reflected in the consolidated balance sheets. If, upon the contribution of nonfinancial assets to a joint venture from us, 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 our proportionate share of the investee’s net income or loss. If we are unable to relate the difference to specific accounts of the investee, the difference should be considered goodwill.
We consider whether the fair value of our equity method investments have declined below their carrying values whenever adverse events or changes in circumstances indicate that recorded values may not be recoverable. If we 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 we would record a write-down of our investment to the estimated fair value.
Leases
We account for leases in accordance with ASC 842, Leases (“ASC 842”). Accordingly, we determine 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 our use by the lessor. Our 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 we are reasonably certain of not exercising, as well as periods covered by renewal options which we are reasonably certain of exercising. We also determine 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.
For leases with a term exceeding 12 months, a lease liability is recorded on the 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 is also 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, we generally use our incremental borrowing rate, determined based on information available at lease commencement, as rates implicit in its leasing arrangements are typically not readily determinable. Our incremental borrowing rate reflects the rate we 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 our operating leases, fixed lease payments are recognized as lease expense on a straight-line basis over the lease term. For leases with a term of 12 months or less, any fixed payments are recognized on a straight-line basis over the lease term and are not recognized on the consolidated balance sheet as an accounting policy election. Leases qualifying for the short-term lease exception are insignificant. Variable lease costs are expensed as incurred and are not included in the measurement of ROU assets and lease liabilities.
ASC 842 provides practical expedients for an entity’s ongoing accounting. We have 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.
37
Derivative Accounting
Luminant Power Agreement
On June 23, 2021, we entered into a power purchase agreement with Luminant, which was subsequently amended and restated on July 9, 2021, and further amended on February 28, 2022 (the “February Amendment”) and August 26, 2022 (the “August Amendment”), for the supply of a fixed amount of electric power to the Odessa Facility at a fixed price for a term of five years with a subsequent automatic annual renewal provision (as amended, the “Luminant Power Agreement”). We are expecting to receive interconnection approval from the Electric Reliability Council of Texas (“ERCOT”) this year, which will allow us to commence mining Bitcoin at the Odessa Facility. Starting from July 1, 2022, under the take or pay framework of the Luminant Power Agreement and pursuant to the ramp-up schedule agreed to between Luminant and us as part of the February Amendment and amended under the August Amendment, Luminant began sales of the scheduled energy in the ERCOT market.
Because ERCOT allows for net settlement, our management determined that, as of July 1, 2022, the Luminant Power Agreement meets the definition of a derivative under ASC 815, Derivatives and Hedging (“ASC 815”). Because we have the ability to sell our electricity in the ERCOT market rather than take physical delivery, physical delivery is not probable through the entirety of the contract and therefore, our management does not believe the normal purchases and normal sales scope exception applies to the Luminant Power Agreement. Accordingly, the Luminant Power Agreement (the non-hedging derivative contract) is recorded at an estimated fair value each reporting period with the change in the fair value recorded in change in fair value of derivative asset in the consolidated statements of operations. See additional information regarding valuation of the Luminant Power Agreement derivative in Note 3.
Depending on the spot market price of electricity, we may opportunistically sell electricity in the ERCOT market in exchange for cash payments, rather than utilizing the power to mine for cryptocurrency at the Odessa Facility during peak times in order to most efficiently manage our operating costs. We, through Luminant, sold $1.7 million in electricity during the three months ended September 30, 2022. These power sales were recorded as part of the change in fair value of derivative asset in the accompanying condensed consolidated statements of operations during the three and nine months ended September 30, 2022. Once we begin cryptocurrency mining at the Odessa Facility, costs under the Luminant Power Agreement will be recorded in cost of revenues in our consolidated statements of operations.
Emerging Growth Company
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period to enable us to comply with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our unaudited condensed consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
38