Cipher Mining Inc.

Hello, and welcome to the Cipher Mining First Quarter 2022 Business Update Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. It is now my pleasure to introduce Lori Barker, Investor Relations.

Good morning, ladies and gentlemen. Thank you for joining us on this conference call to discuss Cypher Mining's first quarter 2022 business update. Joining me on the call today are Tyler Page, Chief Executive Officer, and Ed Farrell, Chief Financial Officer. Please note that you may also review our press release and presentation, which may be found on the Investor Relations section of the website at investorsatcyphermining.com. Please note that this call will be simultaneously webcast on the investor relations section of the company's corporate website. The conference call is the property of Cypher Mining and any taping or other reproduction is expressly prohibited without prior written consent. Before we start, I'd like to remind you that the following discussion, as well as our press release and presentation, contain forward-looking statements, including but not limited to Cypher's financial outlook, business plans and objectives, and other future events and developments, including statements about the market potential of our business operations, potential competition, and our goals and strategies. The forward-looking statements in this conference call include responses to your questions are based on current expectations as of today, and CIFR assumes no obligation to update or revise them whether as a result of new developments or otherwise, except as required by law. Additionally, the following discussion may contain non-GAAP financial measures. We may use non-GAAP measures to describe the way in which we manage and operate our business. We reconcile non-GAAP measures to the most directly comparable GAAP measure, and you are encouraged to examine these reconciliations, which are found at the end of our earnings release issued earlier this morning. I will turn the call over to Tyler.

Tyler? Thank you, Lori. Hello. This is Tyler Page, the CEO of Cypher Mining. Thank you for joining our first quarter earnings call, and I look forward to providing a business update. Let's start with an overview of Cypher Mining. We are a U.S.-based large-scale Bitcoin miner with key competitive advantages in equipment, power, and operations. We brought our first Bitcoin mining operations online in February, and we have significant build-out plans for 2022 and 2023. Notably, we have a business position to withstand cyclicality in Bitcoin mining profitability. We do this by focusing on the main cost drivers of both CapEx and OpEx in the business. In Bitcoin mining, CapEx is dominated by the cost of your fleet of mining rigs. And OPEX is largely the cost of power. We've stayed very focused on maintaining cost discipline at Cypher, despite the inflationary environment the entire world has faced recently. That focus positions Cypher very well for potentially lower Bitcoin prices because with comparatively lower costs, we should be able to keep our machines running profitably when competitors with higher costs face challenges. We are expecting to bring approximately 7.5 exahash per second of hash rate online by early 2023. This is an increase in forecasted hash rate from our last business update due to an improved mix of machines under contract with MicroBT. With this improved mix of machines, we also now have a more efficient fleet of mining rigs on order with an average machine efficiency of about 32.1 joules per terahash. Our average price paid for our rigs is now forecast to be $45.01 per terahash per second. We have a portfolio of long-term power purchase agreements with a compelling weighted average price of 2.7 cents per kilowatt hour. We believe this price is extremely competitive versus our peers. Our operations team is now readying the power and infrastructure at four separate data centers, and we expect to have 275 megawatts available to accept our mining rigs by year end. We anticipate the CapEx costs for these sites outside of the cost of the mining rigs to be about $450,000 per megawatt. Let's discuss some milestones Cipher has achieved since our last call. First, our first quarter shipments of rigs from Bitmain have been installed on time at our Alvarez data center and are now hashing. Our hash rate build will accelerate throughout the year as shipments get larger, and we anticipate that growth in hash rate will pick up meaningfully in the coming quarters, as I will discuss in greater detail later in our deck. Next, we have now increased our hash rate forecast to 7.5 exahash per second, as we recently upgraded our machine purchase contract with MicroBT to include a more efficient mix of higher performing rigs. This new mix of machines in our fleet will add an additional 400 petahash per second to our previous forecast. Lastly, we recently closed our first equipment financing at our Alborz Data Center joint venture with BlockFi for about $47 million. The proceeds from this financing will go towards previously incurred cost for the Bitmain machines on order for the Alborz site. We are excited to partner with BlockFi on the first of what we anticipate will be multiple debt deals for the company in the near future. Now let's turn to our implementation plan and strategy. On slide six, we show an updated forecast for power and infrastructure readiness by site. Our operations team is currently hard at work deploying our first four data centers with an expected fifth to begin later this year. You will notice that our updated forecast reflects the fact that we have pushed out the anticipated start date for BEAR phase two and CHIEF phase two to 2023. Our updated end-of-year forecast for power and infrastructure availability is for a total build of 345 megawatts, with 275 of those megawatts belonging to CIFR and the remainder belonging to our JV partners. This is more than enough power to accommodate installation of all the rigs we have on order. On slide seven, we overlay our data center readiness schedule with our quarterly mining rig shipment schedule. You can see that we forecast to have sites ready to accept machines as they arrive throughout the year and plan to have excess site capacity as well, should we find opportunities to purchase additional machines at attractive prices. Across the bottom of the slide, you can see the hash rate associated with the mining rigs being shipped, billed by quarter. We forecast having roughly 7.5 exahash per second up and running in early 2023. Here are some updated pictures at our Alborz data center, which is nearing completion. The data center is currently operating the rigs we received in the first quarter and will continue to add machines as they arrive in the second quarter until the full 40 megawatts is operational. As you can see from the turbines in the distance, Alborz is 100 percent powered by wind. Slide nine features pictures of progress at Bear and Chief. Once all the machines have been installed at Alborz, the next mining rig shipped will be headed to Bear and Chief, where the sites will be ready to install them. You can see the early infrastructure deployment and our container foundations being set in these pictures from a few weeks ago. Slide 10 shows construction progress at our largest data center in Odessa. The upper left-hand corner has a picture of the site being initially cleared, which I showed off a few months ago. It is a huge 54-acre site. The other pictures show the substation, as well as foundations being placed, along with trenching and electrical work being done. We're thrilled with the progress here already, thanks to our best-in-class construction and operations teams. and look forward to more exciting and fast-paced construction at ODESSA over the coming months. Slide 11 shows some up-close pictures of conduit being put down at ODESSA, as well as the helical piles we use as foundations for our containers. Lastly, let me reiterate some key build-out statistics to note about CIFR as we continue to scale. We have an anticipated weighted average cost for mining rigs of roughly $45.01 per terahash per second. Our average rig efficiency is anticipated to be about 32.1 joules per terahash. We have an anticipated average weighted power price across our portfolio of about 2.7 cents per kilowatt hour. And we anticipate our non-minor infrastructure CapEx cost per megawatt to be roughly $450,000. As the pictures I've shown suggest, we've been extremely busy here at Cipher building out our four sites in Texas. We've made significant progress in the past few months executing to schedule during a time where many are finding it challenging to line up power and equipment. We're happy to have our first machines installed and hashing, and we're excited to get our next machine delivery soon and ramp up our production, particularly in the second half of this year. Now I will pass it off to CIPR's CFO, Ed Ferrell.

Thank you, Tyler, and hello to everyone on the call. As evidenced in the photos that Tyler presented, you can see that we've made significant progress in building out our data centers in the first quarter of 2022. This resulted in fulfilling the commitments we previously announced relating to purchasing mining rigs, electrical infrastructure, security deposits for our power purchase agreements, and corporate-related expenses to support our business. During the quarter, we made scheduled payments relating to mining rigs of approximately $97 million, bringing our total deposits to $207 million, which is recorded as deposits on equipment on the balance sheet. In addition, we made progress payments for property and equipment, which includes transformers and switchgears, of $6.5 million. On March 31, 2022, we had cash of approximately $99.5 million and since then have continued to invest in capital as our plan progresses. If we look at our GAAP operating results for the quarter ending March 31, 2022, we had a net loss of approximately $17.5 million resulting in a net loss per share of $0.07. The primary drivers of this loss include stock-based compensation of $9.5 million, corporate-related expenses approximately $8 million, which include insurance, professional fees, employee compensation benefits, and other public company expenses. I'd like to highlight that although we did mine Bitcoin this quarter, please note that this occurred within our JV Alborz. which Cypher owns 49%, and as such, our economic interest will be accounted for under the equity method, which geographically on our income statement is a component of other income. The Bitcoin reward we received is disclosed as a current asset on the balance sheet. We believe non-GAAP financial measures are also helpful to investors in comparing our performance across reporting periods on a consistent basis. Our non-GAAP P&L and non-GAAP diluted earnings per share exclude the impact of certain non-cash recurring items, which include depreciation of fixed assets, change in fair value of warrant liability, and stock compensation expense. These measures are not a substitute for our GAAP results, but management will use these non-GAAP financial measures internally to help understand, manage, and evaluate business performance and help us make operating decisions. So for the three months ended March 31st, our non-GAAP loss is approximately $7.9 million, resulting in a non-GAAP loss per share of $0.03. We have provided a reconciliation of our GAAP versus non-GAAP results. Finally, we achieved several key milestones in the first quarter, and we look forward to reporting our progress in future periods as we continue to scale Cypher's operations. I will stop there, and Tyler and I are happy to take your questions.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Once again, to ask a question, please press star 1. And our first question comes from the line of Kevin Deed with H.C. Wainwright.

Morning, Tyler, Ed. Thanks for holding the call and thanks for having me on it. A quick question on the, I think it's 207 that you referenced, Ed, deposit for equipment. Now, is that the entire 7.5X to hash deposit? include all the financing you need for that, including the full deployment of, what, almost 350 megawatts?

That's a component of that, Kevin. We're still making payments with regard to the full build-out. And that has all been self-funded with the cash that we had from the proceeds of the deal. Okay.

So, hey, Kevin, it's Tyler, I think you saw we announced recently our first equipment finance deal for about $47 million in total. We are confident at this point, based on the continuing discussions we're having, that that is not our last deal we will be announcing. Obviously, the market is moving around a lot, and so until they're done, they're not done, but we feel confident right now that we will fund the entire build out based on the conversations we're having right now.

Can you give me a ballpark on how, you know, how close you are to that a hundred percent financing for what, you know, what goals you set for the year?

I think it's challenging to give you an exact number, and I'll tell you why. We are scaling, obviously, from a greenfield company, starting from zero and bringing things online. And so to answer that, I would have to get answers about what does future Bitcoin price look like, what does future hash rate look like, because we've got payments that will be going out as Bitcoin mining is happening and sort of coming in as revenue. We also have... you know, some other pieces that would need to be finalized on that spend. So, for example, half the micro BT machine contract is based on a floating price mechanism. We're actually reporting price per terahash with a midpoint there. If prices were to stay where they are, significantly less cash would have to be spent. So it's hard to answer that question exactly, Kevin. We've given the numbers if you want to try to sort of make a forecast on what we have to spend per megawatt and the machine payment terms, um, are all publicly filed. So you can see the month by month payments, but I think the overall takeaway should be based on the conversations we're having right now. We're, we're very confident that, uh, we will be able to fund the entire buildup. Okay.

Well, to your, to your point, right. The markets are in state of flux, right. And, uh, lots of pressure on Bitcoin lately, so I appreciate the color. Noted a lot of your conversations, Senator, on MicroBT. Intel is a new entrant, other main suppliers, and I know you do have relationships with others. Can you just refresh my memory, please, on where you stand there and what you might have or might be considering in terms of alternate suppliers between the main two?

Sure. So, um, just to reiterate what we have under contract currently is 27,000 rigs from Bitmain and 60,000 rigs from micro VT. Um, roughly, you know, those get adjusted plus minus, you know, it's in small amounts as that's the way those contracts work for everyone, but that's the number of machines under contract. Um, We are having conversations, it's fair to say, with every potential manufacturer of equipment in the world because we do have a pretty big pipeline for 2023. We have begun having conversations about securing significant allocations from both the well-known big providers but also some smaller names. And we are certainly exploring new entrants, you know, having discussions with you know, the Intel folks as well as other manufacturers that are out there. But it remains to be seen. What we have under contract currently is the 87,000 rigs for MicroVT and Bitmain.

So, Tyler, you mentioned a push to the right on the Phase 2 developments for Baron Chief. But you didn't really offer rationale for Do you mind talking to that a little bit and maybe giving some insight on what you think your new timing might be aside from 2023? Sure.

So at Bear and Chief are sites where we have a front-of-the-meter power setup. And so as a result, we work with the transmission and distribution service provider on – substation infrastructure. And so we have to work with that transmission and distribution service provider, and they informed us and our JV partner that the substation modifications that need to happen need to get pushed out until 2023. And mid 2023 is the forecast, but I think, you know, that's what we've been told.

Very good. I appreciate it. Thanks for taking my questions, gentlemen. Thanks, Kevin.

Thank you. And as a reminder, ladies and gentlemen, if you have a question, please press star 1 on your telephone. That's star 1. Our next question comes from the line of Chris Brenler with DA Davidson.

Hey, Tyler. Good morning. Congratulations on the progress here. I wanted to ask on the equipment financing transaction, you know, we're seeing a lot of miners looking for these types of transactions. My question is, you know, obviously with the volatile market conditions, you know, lenders may be getting a little bit more nervous. How much does Bitcoin price and the cost of power play into those financing deals, or are they more based on the rate prices themselves in a more direct basis?

That's a great question, Chris. So I think... I can put myself into the shoes of lenders and try to give you the answer. I think it's kind of a blend of many factors, and I think we look pretty favorable versus our competitors because if you think about a lender's risk, yeah, they're going to focus pretty heavily on what you paid for the machines because they're thinking about their loan-to-value risk. And so if – You know, I think it's fair to say that given the marketplace, we've seen loan to values, the ratios get a little more conservative from lenders over the past few months in our conversations. I think that serves us very well with, you know, we generally have one of the lowest costs per terahash per second of compute of any miner. And so I think lenders are and will continue to be comfortable with our model. To your point, you know, thinking about Bitcoin price and power cost, that's very important when they think about forecasting debt service coverage forward. And so the fact that we also have cheap power prices allows us to maintain that profitability when they do their scenario forecasting. So Bitcoin price is very important, but fair to say if you're a lender that no matter where the Bitcoin price is, you're going to be focused on the negative scenarios. What happens if Bitcoin drops a lot? Whether your definition of a lot is where we dropped yesterday or 20,000 or pick your bad scenario. But that's generally, as you would imagine, how a lender thinks about it. And so, again, we look, I think, very favorable versus the competitive landscape because of that cost discipline we've always focused on. Does that answer your question?

Yeah, it does. It makes a ton of sense, actually. A follow-up question, did you disclose the interest rate that you're paying on that new Block 5 facility?

We did not. That contract, given that it actually faces the JV that we own 49% of, and given the overall size of it, we did not have to file the contract. And so that's competitive secret sauce, but happy to say that we think we got extremely competitive rates based on what we've seen in the marketplace.

Yeah, that was kind of what I was thinking, given your power footprint and, you know, metrics that you disclosed here. You should be towards the lower end, so that's good to hear. You know, unrelated question, your power contracts, you know, I think they're great to have a year or so ago, but now what's happened to energy prices, they seem like they're even more valuable. Can you give us a sense of where energy costs are today, how much sort of in the money or below market those contracts are and potentially how valuable they are?

Yeah, I think that's a great question. I think it's hard to put an exact quantum on it, but fair to say – prices are much higher than 2.7 cents per kilowatt hour these days now i think we have a very creative and market leading power structuring team and so we continue to work with our power providers on our future sites that we're negotiating for future deployment um looking for creative ways to monetize um curtailment and demand response, ancillary services, et cetera, to make sure we keep a competitive power price. But, yes, like for example, the contract that we have at Odessa, which is a fixed price contract for five years, is definitely cheaper than what you would get today by a decent amount. It's hard to say the exact quantum, but it is fairly in the money to use the words you used.

Great. One last one, then, is I just may have missed it, but I think you mentioned that your hash rate target has actually gone up, which is really impressive, especially in this environment. What was the source of the increase relative to the last forecast?

Yeah, great question. So, you know, we have worked closely with MicroBT. The way the machine rig works, contracts work at large scale, and it's not just for us, I think it's for everyone that's entering large scale contracts, is you get, you put under contract a blend of machine efficiencies. And I think that sometimes because up the chain, the rig manufacturers don't know the exact makeup of the efficiency of the chips they're going to get when they get a particular batch of wafers. And so We stay in pretty constant contact with Bitmain and MicroBT. In this case, with MicroBT, we talked to them and worked with them about increasing the mix of machines under contract. So it's an updated version of the mix of the 60,000 we will be receiving, and it's a more efficient mix. And so we're very excited about that, obviously, to basically be building the same infrastructure but now be expecting to install a larger amount of hash rate. And as an investment, you know, we have a very favorable pricing arrangement under that contract. And so this was effectively a cheap way to improve, you know, add hash rate but also improve the efficiency of the machines that we are receiving and installing and And the sort of added benefit of that is that, you know, that is likely to extend the useful life of those machines, right? We are getting essentially fewer of the less efficient machines and more of the top-end machines. So, yeah, it was a very positive development for us, and we're very excited about it.

Yeah, that sounds great. What a great way to increase your hash rate forecast. It's pretty easy and not that expensive. Okay, great. Thanks very much for my questions, and hopefully in the next Coli update we see some better market conditions. Fingers crossed.

From your lips to God's ears, Chris. Thank you.

Thanks, Tyler. Thank you. If you have a question, please press star 1 on your telephone. and I'm shown no further questions. So with that, I'll turn the call back over to Chief Executive Officer of Cypher Mining, Tyler Page, for any closing remarks.

Thanks again for joining us this morning. We are making tremendous progress at Cypher. We're very busy every day executing our plan. And I think despite the sort of day-to-day ups and downs of the markets, we remain very positive about our long-term outlook. We have built a business with long-term advantages. Our relentless focus on that cost discipline as well as maintaining discipline in our execution and hitting milestones and deadlines is serving us very well in a tough environment. and we think we will continue to do that and look forward to giving you more continued positive updates on progress and execution in the future. Thank you again for your time.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.