Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 1. Organization and Operation of Our Business
Nature of Operations:
We are a vertically integrated Bitcoin mining
company principally engaged in enhancing our capabilities to mine Bitcoin. We also provide the critical mining infrastructure for our
institutional-scale hosted clients to mine Bitcoin at our Bitcoin mining facility in Rockdale, Texas (the “Whinstone Facility”),
and are beginning development of a second large-scale Bitcoin mining data center facility in Corsicana, Texas (the “Corsicana Facility”),
which is expected to have approximately one gigawatt (“GW”) of capacity for both our Bitcoin mining operations and to host
institutional-scale Bitcoin mining and data center clients. Our Whinstone Facility is believed to be the largest Bitcoin mining facility
in North America, as measured by developed capacity, and we are currently expanding its capacity and developing our new Corsicana Facility
to expand our institutional-scale Bitcoin mining capacity.
We operate in an environment which is consistently
evolving based on the proliferation of Bitcoin and cryptocurrencies in general. A significant component of our strategy is to effectively
and efficiently allocate capital between opportunities that generate the highest return on our capital.
As described in Note 17. “Segment Information”
to these unaudited Notes to Condensed Consolidated Financial Statements, we operate in three business segments: (1) Bitcoin Mining (“Mining”),
(2) Data Center Hosting (“Hosting”), and (3) Electrical Products and Engineering (“Engineering”).
Note 2. Liquidity and Financial Condition
At March 31, 2022, the Company had approximate
balances of cash and cash equivalents of $113.6 million, working capital of $323.5 million, total stockholders’ equity of $1.4 billion
and an accumulated deficit of $202.2 million. To date, the Company has, in large part, relied on equity financings to fund its operations.
In March 2022, the Company sold 200 Bitcoin for proceeds of approximately $9.4 million, which was the Company’s first sale since
2020. The Company is monitoring its balance sheet on an ongoing basis, evaluating the level of Bitcoin retained from monthly production
in consideration of operational and expansion cash requirements. The Company continues to hold a long-term view on its Bitcoin holdings
and believes it is in the best interest of its stockholders to have Bitcoin on its balance sheet. The Company believes its current cash
and Bitcoin on hand is sufficient to meet its operating and capital requirements for at least the next year from the date these unaudited
condensed consolidated financial statements are issued.
During the three months ended March 31, 2022,
the Company paid approximately $103.2 million as deposits primarily for miners and as of March 31, 2022, reclassified $39.0 million to
property and equipment in connection with the deployment of miners at the Whinstone Facility. During the three months ended March 31,
2022, the Company received 6,894 miners at the Whinstone Facility.
2022 ATM Offering:
The Company entered into a Sales Agreement
with Cantor Fitzgerald & Co., B. Riley Securities, Inc., BTIG, LLC, Roth Capital Partners, LLC, D.A. Davidson & Co., Macquarie
Capital (USA) Inc., and Northland Securities, Inc. (the “Sales Agents”) dated March 31, 2022 (the “Sales Agreement”),
pursuant to which the Company may, from time to time, sell up to $500 million in shares of the Company’s common stock through the
Sales Agents, acting as the Company’s sales agent and/or principal, in a continuous at-the-market offering (the “2022 ATM
Offering”). The Company will pay the Sales Agents a commission of up to 3.0% of the aggregate gross proceeds the Company receives
from all sales of the Company’s common stock under the Sales Agreement. As of March 31, 2022, the Company had not received any
proceeds from the 2022 ATM Offering. Subsequent to March 31, 2022, and as of the date of this filing, the Company received net proceeds
on sales of 9.9 million shares of common stock under the Sales Agreement of approximately $140.3 million (after deducting $29 million
in commissions and expenses) at a weighted average price of $14.44.
COVID-19:
The COVID-19 global pandemic has been unprecedented
and unpredictable; its impact is likely to continue to result in significant national and global economic disruption, which may adversely
affect our business. Based on our current assessment, however, we do not expect any material impact on our long-term development, our
operations, or our liquidity due to the worldwide spread of COVID-19, other than the potential impacts of COVID-19 on global logistics
discussed below. We are actively monitoring this situation and the possible effects on our financial condition, liquidity, operations,
suppliers, and industry.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Global Logistics:
Global supply logistics have caused delays
across all channels of distribution. Similarly, we have also experienced delays in certain of our miner delivery schedules and in our
infrastructure development schedules due to constraints on the globalized supply chains for miners, electricity distribution equipment
and construction materials. Through the date of this Quarterly Report, we have been able to effectively mitigate any delivery delays to
avoid materially impacting our miner deployment schedule, however, there are no assurances we will be able to continue to mitigate any
such delivery delays in the future. Additionally, the expansion of the Whinstone Facility and the development of our new Corsicana Facility
requires large quantities of construction materials, specialized electricity distribution equipment and other component parts that can
be difficult to source. We have procured and hold many of the required materials to help mitigate against global supply logistic and pricing
concerns. We monitor developments in the global supply chain and how that may potentially impact our expansion plans. See the discussion
under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report and under Part I, Item 1A of the 2021 Annual
Report for additional discussion regarding potential impacts the global supply chain crisis may have on our operations and plans for expansion.
Note 3. Basis of Presentation, Summary of
Significant Accounting Policies and Recent Accounting Pronouncements
Basis of Presentation and Principles of Consolidation:
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States
of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of
Regulation S-X of the SEC. In the opinion of management, the accompanying unaudited condensed consolidated financial statements
reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of such interim results.
Amounts are in thousands except for share, per share and miner amounts.
The results for the unaudited condensed consolidated statements of operations are not necessarily indicative of results to be expected for the fiscal year ending December 31,
2022 or for any future interim period. The unaudited condensed consolidated financial statements do not include all of the information
and notes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial statements for the fiscal year ended December 31, 2021 and notes
thereto included in the Company’s 2021 Annual Report on Form 10-K filed with the SEC on March 16, 2022.
Reclassifications:
Certain prior period amounts have been reclassified
to conform to the current period presentation in the consolidated financial statements and these accompanying notes. The reclassifications
did not have a material impact on the Company's unaudited condensed consolidated financial statements and related disclosures.
The impact on any prior period disclosures was immaterial.
Use of Estimates:
The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported
amounts of revenue and expenses during the reporting periods. Actual results could differ significantly from those estimates. The most
significant accounting estimates inherent in the preparation of the Company’s unaudited condensed consolidated financial
statements include estimates associated with valuing contingent consideration for a business combination and periodic reassessment of
its fair value, allocating the fair value of purchase consideration to assets acquired and liabilities assumed in business acquisitions,
revenue recognition, valuing the derivative asset classified under Level 3 fair value hierarchy, determining the useful lives and recoverability
of long-lived assets, impairment analysis of goodwill and finite-lived intangibles, stock-based compensation, and the valuation allowance
associated with the Company’s deferred tax assets.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Significant Accounting Policies:
For a detailed discussion about the Company’s
significant accounting policies, see the Company’s December 31, 2021 consolidated financial statements included in its 2021 Annual
Report.
Segment and Reporting Unit Information:
Operating segments are defined as components
of an entity for which discrete financial information is available that is regularly reviewed by the Chief Operating Decision Maker (“CODM”)
in deciding how to allocate resources to an individual segment and in assessing performance. The CODM is comprised of a committee of the
Company’s executive officers. The Company has three operating segments as of March 31, 2022. See Note 17. “Segment Information”
to these unaudited Notes to Condensed Consolidated Financial Statements.
Income Taxes:
The Company accounts for income taxes under
the asset and liability method, in which deferred tax assets and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. A valuation
allowance is required to the extent any deferred tax assets may not be realizable.
ASC Topic 740, Income Taxes, (“ASC
740”), also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and
prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained
upon examination by taxing authorities. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition. Based on the Company’s evaluation, it has been concluded that there are no significant
uncertain tax positions requiring recognition in the Company’s consolidated financial statements. The Company believes that its
income tax positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in material
changes to its financial position.
Income Per Share:
Basic net income per share (“EPS”)
of common stock is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period.
Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The Company excludes
its unvested restricted stock units (“RSUs”) and the holdback of 70,165 shares as security for the ESS Metron sellers’
indemnification obligations under the December 1, 2021 membership interest purchase agreement covering the acquisition, from the net income
(loss) per share calculation.
For the three months ended March 31, 2022
and 2021, the Company recorded net income and therefore, earnings per share was calculated using the treasury stock method. Dilutive
potential common shares include outstanding stock options, restricted stock shares, warrants and the outstanding shares of the Company’s
0% Series B Convertible Preferred Stock (the “Series B Preferred Stock”). Potentially dilutive shares are determined by applying
the treasury stock method to the assumed exercise of outstanding stock options, restricted stock awards and warrants. Potentially dilutive
shares issuable upon conversion of our Series B Preferred Stock for 2021, are calculated using the if-converted method. During the three
months ended March 31, 2022, the remaining 2,199 shares of the Series B Preferred Stock outstanding as of January 1, 2022 were converted
into 2,199 shares of the Company’s common stock.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The following is a reconciliation of the numerator
and denominator of the diluted net income per share computations for the periods presented below (in thousands except for share and per
share amounts):
| |
Three Months Ended March 31, |
| |
2022 | |
2021 |
Basic and diluted income per share: | |
| | | |
| | |
Net income | |
$ | 35,629 | | |
$ | 7,530 | |
| |
| | | |
| | |
Basic weighted average number of shares outstanding | |
| 117,042,347 | | |
| 83,163,400 | |
Add: | |
| | | |
| — | |
Options to purchase common stock | |
| — | | |
| 10,788 | |
Warrants to purchase common stock | |
| — | | |
| 530,623 | |
Unvested restricted stock awards | |
| — | | |
| 4,712 | |
Convertible Series B preferred shares | |
| — | | |
| 2,628 | |
Diluted weighted average number of shares outstanding | |
| 117,042,347 | | |
| 83,712,151 | |
| |
| | | |
| | |
Basic net income per share | |
$ | 0.30 | | |
$ | 0.09 | |
| |
| | | |
| | |
Diluted net income per share | |
$ | 0.30 | | |
$ | 0.09 | |
Recently Issued and Adopted Accounting
Pronouncements:
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”). This ASU 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. This ASU 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. This ASU is
effective for all entities for fiscal years beginning after December 15, 2021. An entity should apply the amendments prospectively
to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted, including
adoption in an interim period. The adoption of ASU 2021-04 on January 1, 2022 did not have a material impact on the Company’s
condensed consolidated financial statements or disclosures.
The Company continually assesses any new accounting
pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company’s
financial reporting, the Company undertakes a study to determine the consequences of the change to its condensed consolidated
financial statements and assures that there are proper controls in place to ascertain that the Company’s unaudited condensed consolidated financial statements properly reflect the change.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 4. Acquisitions
Acquisition of ESS Metron:
On December 1, 2021, the Company acquired 100%
of the equity interests of ESS Metron. ESS Metron is based in Denver, Colorado, operating from facilities totaling approximately 121,000
square feet. The facilities are subject to long-term lease agreements.
The acquisition-date fair value of the total
consideration transferred was comprised of $25 million of cash, adjusted for net working capital and other items, and 715,413 shares
of the Company’s common stock, no par value, with a fair value of approximately $26.7 million. Of the 715,413 shares of common
stock, 645,248 shares were issued upon closing, and the remaining 70,165 shares were withheld as security for the
sellers’ indemnification obligations for 18 months following the transaction closing date.
Other than an insignificant post-closing settlement
of preliminary net working capital pursuant to the Membership Interest Purchase Agreement dated December 1, 2021, there have been no adjustments
to the provisional purchase price and fair value estimates presented in Note 4. “Acquisitions” of the 2021 Annual Report.
The Company expects to finalize the valuation of these assets and liabilities, and consideration transferred, as soon as practicable,
but not later than one year from the acquisition date. Any changes to the preliminary estimates of the fair value of the assets acquired
and liabilities assumed will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill.
Acquisition of Whinstone:
On May 26, 2021, the Company acquired 100%
of the equity interests of Whinstone US, Inc. (“Whinstone”), the owner and operator of a Bitcoin mining and hosting facility,
for approximately $460 million (the “Whinstone Acquisition”). The assets and operations of Whinstone increases the scale and
scope of Riot’s operations, which is a foundational element in the Company’s strategy to become an industry-leading Bitcoin
mining platform on a global scale.
The acquisition-date fair value of the total
consideration transferred was comprised of $80 million of cash, adjusted for net working capital and other items, and 11.8 million
shares of the Company’s common stock, no par value, with a fair value of approximately $326 million. As part of cash at closing,
net debt outstanding from Whinstone to its parent (Whinstone Seller) totaling approximately $38 million was repaid
and certain seller transaction costs were paid. The Company also agreed to pay Seller up to approximately $86 million (undiscounted)
in additional consideration if certain future power credits are realized by Whinstone.
There have been no adjustments to the provisional
purchase price and fair value estimates presented in Note 4. “Acquisitions”, of the 2021 Annual Report. The Company
expects to finalize the valuation of these assets and liabilities, and consideration transferred, during the second quarter of 2022, but
not later than one year from the Acquisition Date. Any changes to the preliminary estimates of the fair value of the assets acquired and
liabilities assumed will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Pro Forma Information (Unaudited):
The following unaudited pro forma financial
information summarizes the combined results of operations for Riot, Whinstone and ESS Metron as if the companies were combined as of January
1, 2020. The unaudited pro forma information does not reflect the effect of costs or synergies that may result from the acquisition. The
pro forma information excludes acquisition-related costs of $21.3 million as these costs were included in pro forma net income for
the year ended December 31, 2020. The pro forma information does not purport to be indicative of the results of operations that actually
would have resulted had the combination occurred on January 1, 2020, or of future results of the consolidated entities. This unaudited
pro forma information is presented for informational purposes only and is not necessarily indicative of future operating results of the
combined company (in thousands).
| |
Three
Months Ended March 31, 2021 |
Total revenue | |
$ | 39,399 | |
Net income | |
$ | 98,917 | |
Note 5. Revenue from Contracts with Customers
The Company recognizes revenue when it transfers
promised services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those services.
Disaggregated revenue:
The following table presents the Company’s
revenues disaggregated into categories based on the nature of such revenues (in thousands):
Schedule of Disaggregated
Revenue
| |
Three Months Ended March 31, |
| |
2022 | |
2021 |
Mining | |
$ | 57,945 | | |
$ | 23,173 | |
Hosting | |
| 9,694 | | |
| — | |
Engineering | |
| 12,124 | | |
| — | |
Other | |
| 24 | | |
| 24 | |
Total revenue | |
$ | 79,787 | | |
$ | 23,197 | |
Contract balances:
For the three months ended March 31, 2022 and
2021, the Company did not recognize material bad-debt expense. Contract assets consist of costs and estimated earnings in excess of billings
on uncompleted engineering contracts. The balance was entirely from the ESS Metron acquisition and was $11.1 million and $9.9 million
as of March 31, 2022 and December 31, 2021, respectively.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial
Statements
(Unaudited)
The Company’s contract liabilities primarily
relate to upfront payments and consideration received from customers for data center hosting, billings in excess of costs and estimated
earnings on uncompleted engineering contracts and the upfront license fee generated from our legacy animal health business. The table
below presents changes in the total deferred revenue liability and billings in excess of costs and estimated earnings, for the three months
ended March 31, 2022 (in thousands):
Beginning balance - January 1, 2022 | |
$ | 27,903 | |
Revenue recognized | |
| (865 | ) |
Ending balance - March 31, 2022 | |
$ | 27,038 | |
Transaction price allocated to remaining performance obligations:
Remaining performance obligations represent
the transaction price of contracts for work that has not yet been performed. Amounts related to Bitcoin mining are not included
because the Company elected the practical expedient to not disclose amounts related to contracts with a duration of one year or less.
Additionally, we have elected to use the practical
expedient to not adjust the transaction price for the existence of a significant financing component if the timing difference between
a customer’s payment and our performance is one year or less.
Note 6. Cryptocurrencies
The following table presents additional information about Bitcoin:
Beginning balance - January 1, 2022 | |
$ | 159,544 | |
Revenue recognized | |
| 57,945 | |
Proceeds from sale | |
| (10,701 | ) |
Realized gain on sale/exchange | |
| 9,236 | |
Impairment | |
| (26,390 | ) |
Ending balance - March 31, 2022 | |
$ | 189,634 | |
Note 7. Investments in Marketable Equity Securities
During the three months ended March 31, 2022,
the Company recorded an unrealized loss on 3.2 million shares of Mogo Inc. of approximately $1.6 million based on the closing price per
share of Mogo common stock on NASDAQ on March 31, 2022 of $2.91. The daily share price is extremely volatile and may be more or less than
the amount recorded as of March 31, 2022.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 8. Property and Equipment
Property and equipment:
Property and equipment consisted of the following as of March 31,
2022 and December 31, 2021:
| |
Life
(Years) | | |
March
31, 2022 | | |
December
31, 2021 | |
Buildings and improvements | |
| 10-25 | | |
$ | 144,230 | | |
$ | 78,548 | |
Miners and mining equipment | |
| 2 | | |
| 130,475 | | |
| 87,921 | |
Machinery and facility equipment | |
| 5-7 | | |
| 15,358 | | |
| 12,373 | |
Office and computer equipment | |
| 3 | | |
| 1,061 | | |
| 1,007 | |
Construction in progress | |
| | | |
| 78,374 | | |
| 113,598 | |
Total cost of property and equipment | |
| | | |
| 369,498 | | |
| 293,447 | |
Less accumulated depreciation | |
| | | |
| (44,366 | ) | |
| (30,467 | ) |
Property and equipment, net | |
| | | |
$ | 325,132 | | |
$ | 262,980 | |
During the three months ended March 31, 2022,
the Company received 6,894 miners related to its current purchase contracts with Bitmain and, as of March 31, 2022, had deployed a total
of 42,919 miners in its mining operation.
During the three months ended March 31, 2022,
the Company paid approximately $103.2 million as deposits, primarily for miners, which are scheduled to be delivered on a monthly basis
through December 2022. As of March 31, 2022, the Company reclassified $39.0 million to property and equipment in connection with the deployment
of miners at the Whinstone Facility. During the three months ended March 31, 2022, the Company received 6,894 miners at the Whinstone
Facility.
During the year ended December 31, 2021, we
entered into six additional purchase agreements with Bitmain to acquire 52,500 Antminer model S19j (90 Terahash per second) (“TH/s”)
miners and 30,000 of their latest Antminer model S19XP (140 TH/s) miners for a combined total purchase price of approximately $535.0 million.
Pursuant to these agreements, approximately $214.4 million remains payable to Bitmain in installments in advance of shipment of the miners,
which is scheduled to occur on a monthly basis through December 2022.
Depreciation and amortization expense related
to property and equipment totaled approximately $13.9 million and $2.8 million, for the three months ended March 31, 2022 and 2021, respectively.
Depreciation is computed on the straight-line basis for the periods
the assets are in service.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial
Statements
(Unaudited)
Commitment:
As of March 31, 2022, the Company had outstanding executed purchase agreements
for the purchase of miners from Bitmain for a total of 41,601 new S19j-Pro model miners and 30,000 new S19XP model miners, scheduled to
be delivered through December 2022, and had paid a deposit of 62% of the total purchase price. A summary of the purchase agreement commitments,
deposits paid and expected delivery timing (remaining balances are payable in advance of shipping) is summarized as follows (in thousands):
Agreement
Date * | |
Original
Purchase Commitment | | |
Additional
Purchases | | |
Open
Purchase Commitment | | |
Deposit
Balance | | |
Expected
Shipping |
April 5, 2021 | |
$ | 138,506 | | |
$ | 11,950 | | |
$ | 35,488 | | |
$ | 114,968 | | |
Second Quarter 2022 - Fourth Quarter 2022 |
October 29, 2021 | |
| 56,250 | | |
| — | | |
| 22,500 | | |
| 33,750 | | |
Second Quarter 2022 - Third Quarter 2022 |
November 22, 2021 | |
| 32,550 | | |
| — | | |
| 15,278 | | |
| 17,272 | | |
Third Quarter 2022 - Fourth Quarter 2022 |
December 10, 2021 | |
| 97,650 | | |
| — | | |
| 45,833 | | |
| 51,817 | | |
Third Quarter 2022 - Fourth Quarter 2022 |
December 24, 2021 | |
| 202,860 | | |
| — | | |
| 95,256 | | |
| 107,604 | | |
Third Quarter 2022 - Fourth Quarter 2022 |
Total | |
$ | 527,816 | | |
$ | 11,950 | | |
$ | 214,355 | | |
$ | 325,411 | | |
|
* Pursuant to the Company’s agreements
with Bitmain, the Company is responsible for all shipping charges incurred in connection with the delivery of the miners.
Note 9. Intangible Assets, net
Intangible assets consisted of the following as of March 31, 2022
and December 31, 2021:
| |
Gross book value | | |
Accumulated amortization | | |
Net book value | | |
Weighted-average life (years) | |
Customer contracts | |
$ | 6,300 | | |
$ | (207 | ) | |
$ | 6,093 | | |
| 10 | |
Trademark | |
| 5,000 | | |
| (166 | ) | |
| 4,834 | | |
| 10 | |
UL Listings | |
| 2,700 | | |
| (75 | ) | |
| 2,625 | | |
| 12 | |
Patents | |
| 559 | | |
| (388 | ) | |
| 171 | | |
| Various | |
Intangible assets, net as of March 31, 2022 | |
$ | 14,559 | | |
$ | (836 | ) | |
$ | 13,723 | | |
| | |
| |
Gross
book value | | |
Accumulated
amortization | | |
Net book
value | | |
Weighted-average
life (years) | |
Customer contracts | |
$ | 6,300 | | |
$ | (51 | ) | |
$ | 6,249 | | |
| 10 | |
Trademark | |
| 5,000 | | |
| (42 | ) | |
| 4,958 | | |
| 10 | |
UL Listings | |
| 2,700 | | |
| (19 | ) | |
| 2,681 | | |
| 12 | |
Patents | |
| 742 | | |
| (468 | ) | |
| 274 | | |
| Various | |
Intangible assets, net as of December 31, 2021 | |
$ | 14,742 | | |
$ | (580 | ) | |
$ | 14,162 | | |
| | |
The intangible assets are being amortized over their
respective original useful lives, which range from 10-12 years. The Company recorded amortization expense of $0.4 million and $0.02 million
for the three months ended March 31, 2022 and 2021, respectively.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The estimated future amortization expense associated
with intangible assets is as follows:
|
| |
Estimated
amortization expense | | |
For the nine months ending December 31, 2022 | |
$ | 1,067 | |
For the year ending December 31, 2023 | |
| 1,390 | |
For the year ending December 31, 2024 | |
| 1,380 | |
For the year ending December 31, 2025 | |
| 1,378 | |
For the year ending December 31, 2026 | |
| 1,376 | |
For the year ending December 31, 2027 | |
| 1,367 | |
For the year ending December 31, 2028 and thereafter | |
| 5,765 | |
Total | |
$ | 13,723 | |
Note 10. Long-Term Assets
Deposits:
Deposits consisted of the following as of March 31, 2022:
Deposits on equipment | |
| |
Beginning balance | |
$ | 261,215 | |
Additions | |
| 103,161 | |
Reclassification to property and equipment | |
| (38,965 | ) |
Ending balance | |
| 325,411 | |
Security deposits | |
| 4,949 | |
Deposits at March 31, 2022 | |
$ | 330,360 | |
Deposits on Equipment:
During the three months ended March 31, 2022, the Company paid approximately $103.2
million as deposits, primarily for miners, and, as of March 31, 2022, reclassified $39.0 million to property and equipment in connection
with the deployment of miners at the Whinstone Facility. See Note 8. “Property and Equipment” to these unaudited Notes to
Condensed Consolidated Financial Statements.
Right of Use Assets:
See Note 12. “Leases” to these unaudited Notes to Condensed
Consolidated Financial Statements.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 11. Accrued Expenses
As of March 31, 2022 and December 31, 2021, the Company’s accrued expenses
consisted of the following:
| |
March
31, 2022 | | |
December
31, 2021 | |
Construction in progress | |
$ | 946 | | |
$ | 12,110 | |
Power supply | |
| 10,402 | | |
| — | |
Compensation | |
| 2,629 | | |
| 5,927 | |
Insurance | |
| — | | |
| 2,507 | |
Other | |
| 2,453 | | |
| 1,527 | |
Total accrued expenses | |
$ | 16,430 | | |
$ | 22,071 | |
Note 12. Leases
At March 31, 2022, the Company had operating
lease liabilities and right of use assets for its offices, manufacturing facilities of ESS Metron, and a ground lease at the Whinstone
Facility that expire on various dates through January 2032, inclusive of extension options the Company is reasonably certain will be exercised.
Rental expense for lease payments related to
the Company’s operating leases is recognized on a straight-line basis over the remaining lease term. The Company currently does
not hold any finance leases. The Company elected to use the practical expedient of not separating lease components for its real estate
leases. The Company has elected the short-term lease exception provided, and therefore only recognizes right of use assets and lease liabilities
for leases with a term greater than one year. Leases qualifying for the short-term lease exception were insignificant.
As of March 31, 2022 and December 31, 2021,
the right of use assets were $21.6 million and $13.2 million, respectively, and the operating lease liabilities were $21.9 million and
$13.4 million, respectively, in the accompanying unaudited condensed consolidated balance sheets related to our ground lease and
office leases. Operating lease right of use assets are included within long-term assets on the unaudited condensed consolidated
balance sheets.
The calculation of the right of use assets
and lease liabilities include minimum lease payments over the remaining lease term. Variable lease payments are excluded from the amounts
and are recognized in earnings in the period in which the obligation for those payments is incurred. To determine the present value of
future minimum lease payments, the Company utilized its incremental borrowing rate adjusted for the remaining lease term and the form
of underlying collateral. The discount rate implicit in the leases was not readily determinable.
During the three months ended March 31, 2022,
the Company executed a third lease amendment to the ground lease for the Whinstone facility, to add a second 100-acre tract of real property
contiguous to the existing 100-acre tract on which the existing Whinstone Facility sits for an additional $0.9 million in annual payments.
The initial term of the lease is scheduled to expire on January 31, 2032. Concurrent with this third amendment, the Company executed a
first amendment to the water reservation agreement to obtain additional water from a nearby lake to be used by the Company for commercial
purposes, such as evaporative cooling in our data center facility, for an additional $1.0 million in annual payments. The term of the
original water reservation agreement was reset for a period of twelve years from the original commencement date of April 2021, now expiring
on January 31, 2032.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The components of lease expense for the three
months ended March 31, 2022 (in thousands):
| |
Three Months Ended March 31, |
Lease cost | |
2022 |
Operating lease cost | |
$ | 622 | |
Variable lease cost(1) | |
| 45 | |
Total rent expense | |
$ | 667 | |
(1) | Amounts primarily include common area maintenance and utility charges not included in the measurement of right of use assets and operating lease liabilities. |
Other Information
| |
Three Months Ended March 31, | |
Other information | |
2022 | |
Operating cash flows from operating leases | |
$ | — | |
Right of use assets exchanged for new operating lease liabilities | |
$ | 8,784 | |
Weighted-average remaining lease term – operating leases (years) | |
| 6.9 | |
Weighted-average discount rate – operating leases | |
| 6.5 | % |
The following table represents our future minimum operating
lease payments as of, and subsequent to, March 31, 2022 under ASC 842 (in thousands):
| | |
Ground
lease | | |
Office
and other leases | | |
Total | |
| Nine months ending December 31, 2022 | | |
$ | 1,412 | | |
$ | 743 | | |
$ | 2,155 | |
| 2023 | | |
| 1,935 | | |
| 1,012 | | |
| 2,947 | |
| 2024 | | |
| 1,993 | | |
| 1,001 | | |
| 2,994 | |
| 2025 | | |
| 2,053 | | |
| 908 | | |
| 2,961 | |
| 2026 | | |
| 2,114 | | |
| 822 | | |
| 2,936 | |
| 2027 | | |
| 2,178 | | |
| 839 | | |
| 3,017 | |
| Thereafter | | |
| 9,664 | | |
| 6,030 | | |
| 15,694 | |
| Total undiscounted lease payments | | |
| 21,349 | | |
| 11,355 | | |
| 32,704 | |
| Less present value discount | | |
| (6,555 | ) | |
| (4,296 | ) | |
| (10,851 | ) |
| Present value of lease liabilities | | |
$ | 14,794 | | |
$ | 7,059 | | |
$ | 21,853 | |
We recognize ground lease expense in cost of revenues - hosting, and office
and other lease expense in selling, general and administrative expenses, respectively, in the accompanying unaudited condensed consolidated statements of operations.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 13. Stockholders’ Equity
Preferred stock:
During the three months ended March 31, 2022,
the remaining 2,199 shares of the Company’s 0% Series B Convertible Preferred Stock were converted to 2,199 shares of its common
stock.
Common Stock:
During the three months ended March 31, 2022,
the Company granted 50,304 service-based restricted stock units with a fair value of approximately $1.0 million and 365,500 performance-based
restricted stock units with a fair value of approximately $7.3 million.
During the three months ended March 31, 2022,
978,773 shares of common stock were issued to the Company’s officers and employees in settlement of an equal number of fully vested
restricted stock units awarded to such individuals by the Company pursuant to grants made under the Riot Blockchain, Inc. 2019 Equity
Incentive Plan, as amended (the “2019 Equity Plan”). The Company withheld 425,140 of these shares at a fair value of approximately
$8.3 million, to cover withholding taxes related to the settlement of these vested restricted stock units, as permitted by the 2019 Equity
Plan.
During the three months ended March 31, 2022
the Company did not sell any shares of common stock or receive any proceeds from the 2022 ATM Offering.
Note 14. Restricted Common Stock, Stock Options, Restricted Stock
Units (“RSUs”) and Warrants
Stock-Based Compensation:
The Company’s stock-based compensation expenses recognized during
the three months ended March 31, 2022 and 2021 were attributable to selling, general and administrative expenses, which are included in
the accompanying unaudited condensed consolidated statements of operations.
The Company recognized stock-based compensation
expense during the three months ended March 31, 2022 and 2021 as follows:
| |
Three
Months Ended March 31, | |
| |
2022 | | |
2021 | |
Service-based restricted stock awards | |
$ | 1,282 | | |
$ | 936 | |
Performance-based restricted stock awards | |
| 1,760 | | |
| — | |
Total stock-based compensation | |
$ | 3,042 | | |
$ | 936 | |
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Restricted Common Stock Awards:
Performance-based RSUs
A summary of the Company’s unvested performance-based
restricted stock units for the three months ended March 31, 2022 is presented here:
| | |
Number
of Shares | | |
Weighted
Average Grant-Date Fair Value | |
| Unvested at January 1, 2022 | | |
| 3,404,585 | | |
$ | 36.68 | |
| Granted | | |
| 365,500 | | |
| 20.09 | |
| Vested | | |
| (383,574 | ) | |
| 36.66 | |
| Unvested at March 31, 2022 | | |
| 3,386,511 | | |
$ | 34.89 | |
During the three months ended March 31, 2022,
the Company awarded 365,500 performance-based restricted shares of common stock under the 2019 Equity Plan to employees, which are eligible
to vest upon the successful completion of specified milestones related to added infrastructure capacity and financial targets over a three-year
performance period ending on December 31, 2023.
The value of performance-based restricted stock
grants is measured based on their fair market value on the date of grant and amortized over their respective estimated implicit service
periods. As of March 31, 2022, there was approximately $31.0 million of total unrecognized compensation cost related to performance-based
restricted stock awards, which is expected to be recognized over a remaining weighted-average vesting period of approximately seven months.
Service-based RSUs
A summary of the Company’s unvested service-based
restricted stock units for the three months ended March 31, 2022 is presented here:
| | |
Number of Shares | | |
Weighted Average Grant-Date Fair Value | |
| Unvested at January 1, 2022 | | |
| 610,561 | | |
$ | 5.93 | |
| Vested | | |
| (570,524 | ) | |
| 3.93 | |
| Granted | | |
| 50,304 | | |
| 19.41 | |
| Unvested at March 31, 2022 | | |
| 90,341 | | |
$ | 26.06 | |
The value of service-based restricted stock
grants is measured based on their fair market value on the date of grant and amortized over their respective vesting periods. During the
three months ended March 31, 2022, the fair value of awards granted totaled $1.0 million and as of March 31, 2022, there was approximately
$1.9 million of total unrecognized compensation cost related to unvested service-based restricted common stock rights, which is expected
to be recognized over a remaining weighted-average vesting period of approximately five months.
Other Common Stock Purchase Warrants:
As of March 31, 2022, the Company issued a warrant to purchase up to 63,000
shares of the Company’s common stock at a purchase price of $48.37 per share to XMS Capital Partners, LLC (“XMS”) as
partial payment for its advisory services in connection with the Company’s Whinstone Acquisition. The warrant can be exercised any
time through August 12, 2026.
No warrants were issued during the three months ended March 31, 2022.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 15. Fair Value Measurements
Assets and liabilities measured at fair value on a recurring
basis:
The Company’s assets and liabilities
measured at fair value on a recurring basis consisted of the following as of March 31, 2022, and December 31, 2021:
| |
Fair
value measured at March 31, 2022 | |
| |
Total
carrying value at
March
31, 2022 | | |
Quoted
prices in active markets (Level 1) | | |
Significant
other observable inputs (Level 2) | | |
Significant
unobservable inputs (Level 3) | |
Derivative asset | |
$ | 69,762 | | |
$ | — | | |
$ | — | | |
$ | 69,762 | |
Contingent consideration liability | |
$ | 79,261 | | |
$ | — | | |
$ | — | | |
$ | 79,261 | |
| |
Fair
value measured at December 31, 2021 | |
| |
Total
carrying value at December 31, 2021 | | |
Quoted
prices in active markets (Level 1) | | |
Significant
other observable inputs (Level 2) | | |
Significant
unobservable inputs (Level 3) | |
Derivative asset | |
$ | 26,079 | | |
$ | — | | |
$ | — | | |
$ | 26,079 | |
Contingent consideration liability | |
$ | 83,928 | | |
$ | — | | |
$ | — | | |
$ | 83,928 | |
Level 3 Assets:
Power Supply Agreement
During the year ended December 31, 2021, the
Company recorded a derivative asset related to its Power Supply Agreement with TXU Energy Retail Company LLC (“TXU”), the
energy supplier to the Company’s Whinstone Facility (the “Power Supply Agreement”). The Power Supply Agreement was classified
as a derivative asset and measured at fair value on the date of the Company’s acquisition of Whinstone, with changes in fair value
recognized in change in fair value of derivative asset in operating income or loss on the accompanying unaudited condensed consolidated
statements of operations. The contract was not designated as a hedging instrument. Prior to the Whinstone Acquisition, the Company did
not have any derivative contracts. The estimated fair value of the Company’s derivate asset is classified in Level 3 of the fair
value hierarchy due to the significant unobservable inputs utilized in the valuation. Specifically, our discounted cash flow estimation
models contain quoted commodity exchange spot and forward prices and are adjusted for basis spreads for load zone-to-hub differentials
through the term of the Power Supply Agreement, which ends in April 2030. The discount rate utilized of approximately 21% includes
observable market inputs, but also includes unobservable inputs based on qualitative judgment related to company-specific risk factors.
The terms of the Power Supply Agreement require margin-based collateral,
calculated as exposure resulting from fluctuations in the market cost rate of electricity versus the fixed price stated in the contract.
The margin-based collateral requirement to the Company was zero as of March 31, 2022 and December 31, 2021.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Level 3 Liabilities:
Business Combination Contingent Consideration
The Company recorded a Level 3 financial liability during the year ended
December 31, 2021, relating to the contingent consideration arrangement arising from the acquisition of Whinstone. Contingent consideration
represents an obligation of the Company to transfer cash to Northern Data AG (“Whinstone Seller”) when Whinstone realizes
or receives a benefit from utilization of certain defined power credits. The Company estimated the fair value of the contingent consideration
using a discounted cash flow analysis, which includes estimates of both the timing and amounts of potential future power credits. These
estimates were determined using the Company’s historical consumption quantities and patterns combined with management’s expectations
of its future consumption requirements, which require significant judgment and depend on various factors outside the Company’s control,
such as construction delays. The discount rate of approximately 2.5% includes observable market inputs, such as TXU’s parent company’s
Standard & Poor’s credit rating of BB, but also includes unobservable inputs such as interest rate spreads, which were estimated
based on qualitative judgment related to company-specific risk factors. Specifically, due to the power credits being subordinated obligations
for TXU’s parent, we used one credit rating lower than BB in our yield curve to estimate a reasonable interest rate spread to determine
the cost of debt input. The significant assumptions used to estimate fair value of the derivative contract include a discount rate of
21%, which reflected the nature of the contract as it relates to the risk and uncertainty of the estimated future mark-to-market adjustments,
forward price curves of the power supply, broker/dealer quotes and other similar data obtained from quoted market prices or independent
pricing vendors. Although these estimates are based on management’s best knowledge of current events, the estimates could change
significantly from period to period. Actual results that differ from the assumptions used and any changes to the significant assumptions
and unobservable inputs used could have a material impact on future results of operations.
Changes in Level 3 assets and liabilities measured at fair
value on a recurring basis:
Unobservable inputs were used to determine
the fair value of positions that the Company has classified within the Level 3 category. Unrealized gains and losses associated with the
asset within the Level 3 category includes changes in fair value that were attributable to unobservable (e.g., changes in unobservable
long-dated volatilities) inputs.
The following table presents the changes in
the estimated fair value of the derivative asset measured using significant unobservable inputs (Level 3) for the three months ended March
31, 2022:
| |
Derivative
Asset | |
Balance as of January 1, 2022 | |
$ | 26,079 | |
Change in fair value | |
| 43,683 | |
Balance as of March 31, 2022 | |
$ | 69,762 | |
For the three months ended March 31, 2022,
there was a change of approximately $43.7 million in Level 3 assets measured at fair value. Additionally, during the three months ended
March 31, 2022, power sales back into the Electric Reliability Council of Texas (“ERCOT”) marketplace through Whinstone’s
participation in ERCOT’s energy demand response programs totaled $2.5 million and were recorded in change in fair value of derivative
asset in the unaudited condensed consolidated statements of operations. There were no Level 3 assets for the three months ended
March 31, 2021.
The following table presents the changes in
the estimated fair value of our liability for contingent consideration measured using significant unobservable inputs (Level 3) for the
three months ended March 31, 2022:
| |
Contingent
Consideration Liability | |
Balance as of January 1, 2022 | |
$ | 83,928 | |
Payments to Whinstone Seller | |
| (4,843 | ) |
Change in fair value | |
| 176 | |
Balance as of March 31, 2022 | |
$ | 79,261 | |
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
For the three months ended March 31, 2022,
the change in Level 3 liabilities measured at fair value was $0.2 million. There were no Level 3 liabilities for the three months ended
March 31, 2021. The Company’s estimated liability for contingent consideration represents potential payments of additional consideration
for the Whinstone Acquisition, payable if Whinstone realizes or receives a benefit from utilization of certain defined power credits.
During the three months ended March 31, 2022, the Company paid approximately $4.8 million of the contingent consideration liability. Changes
in the fair value of contingent consideration are recorded in the unaudited condensed consolidated statements of operations within
change in fair value of contingent consideration.
There were no transfers of financial instruments between Level 1,
Level 2 and Level 3 during the periods presented.
Note 16. Commitments and Contingencies
Commitments:
Operating Leases:
The Company leases its primary office locations,
manufacturing facilities and hosting facilities, as well as a ground lease, under noncancelable lease agreements that expire on varying
dates through 2032. See Note 12. “Leases” to these unaudited Notes to Condensed Consolidated Financial Statements.
Water Reservation Agreement:
Whinstone executed a water reservation agreement
in April 2021 with the lessor of the ground lease to obtain a certain quantity of water from a nearby lake to be used by the Company
for evaporative cooling at our Whinstone Facility. During the three months ended March 31, 2022, and concurrent with the third amendment
to the ground lease described in Note 12. “Leases” to these unaudited Notes to Condensed Consolidated Financial Statements,
the Company executed a first amendment to the water reservation agreement to obtain additional water for the expanded lease area, for
an additional $1.0 million in annual payments. The term of the water reservation agreement was reset for a period now expiring on January
31, 2032 and requires total annual payments of approximately $2.0 million.
The Company concluded that the agreement was not a lease or
a derivative instrument. Because the Company obtained an additional right of use for the reserved water amount, and the charges were
increased by a standalone price commensurate with the additional water use rights and at market rates, the water reservation agreement
was determined to be a lease modification accounted for as a separate contract. As such, the fees of the water reservation agreement
were excluded from the lease payments of the ground lease and the water reservation agreement was accounted for as a separate executory
contract.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Contingencies:
Legal Proceedings:
The Company, and its subsidiaries, are subject
at times to various claims, lawsuits and governmental proceedings relating to the Company’s business and transactions arising in
the ordinary course of business. The Company cannot predict the final outcome of such proceedings. Where appropriate, the Company vigorously
defends such claims, lawsuits and proceedings. Some of these claims, lawsuits and proceedings seek damages, including, consequential,
exemplary or punitive damages, in amounts that could, if awarded, be significant. Certain of the claims, lawsuits and proceedings arising
in ordinary course of business are covered by the Company’s insurance program. The Company maintains property and various types
of liability insurance in an effort to protect the Company from such claims. In terms of any matters where there is no insurance coverage
available to the Company, or where coverage is available and the Company maintains a retention or deductible associated with such insurance,
the Company may establish an accrual for such loss, retention or deductible based on current available information. In accordance with
accounting guidance, if it is probable that an asset has been impaired or a liability has been incurred as of the date of the financial
statements, and the amount of loss is reasonably estimable, then an accrual for the cost to resolve or settle these claims is recorded
by the Company in the accompanying consolidated balance sheets. If it is reasonably possible that an asset may be impaired as of the date
of the financial statement, then the Company discloses the range of possible loss. Expenses related to the defense of such claims are
recorded by the Company as incurred and included in the accompanying consolidated statements of operations. Management, with the assistance
of outside counsel, may from time to time adjust such accruals according to new developments in the matter, court rulings, or changes
in the strategy affecting the Company’s defense of such matters. On the basis of current information, the Company does not believe
there is a reasonable possibility that, other than with regard to the Class Action described below, any material loss, if any, will result
from any claims, lawsuits and proceedings to which the Company is subject to either individually, or in the aggregate.
Class Actions and Related Claims
On February
17, 2018, Creighton Takata filed an action asserting putative class action claims on behalf of the Company’s stockholders in the
United District Court for the District of New Jersey, Takata v. Riot Blockchain Inc., et al., Case No. 3: 18-cv-02293. On
April 18, 2018, Joseph J. Klapper, Jr., filed a complaint against Riot Blockchain, Inc., and certain of its officers and directors in
the United District Court for the District of New Jersey, Klapper v. Riot Blockchain Inc., et al., Case No. 3: 18-cv-8031. The
complaints contained substantially similar allegations, asserting violations of federal securities laws under Section 10(b) and Section
20(a) of the Securities Exchange Act of 1934 on behalf of a putative class of stockholders that purchased stock from November 13, 2017
through February 15, 2018. The complaints alleged that the Company and certain of its officers and directors made, caused to be made,
or failed to correct false and/or misleading statements in press releases and public filings regarding its business plan in connection
with its cryptocurrency business. The complaints request damages in unspecified amounts, costs and fees of bringing the action, and other
unspecified relief.
On November
6, 2018, the court in the Takata action issued an order consolidating Takata with Klapper into
a single putative class action. On April 30, 2020, the court granted Defendants’ motions to dismiss the consolidated complaint,
which resulted in the dismissal of all claims without prejudice.
On December
24, 2020, Lead Plaintiff filed another amended complaint. On April 8, 2022, the court again granted Defendants’ motions to dismiss
the operative complaint without prejudice. On May 9, 2022, Lead Plaintiff filed a motion for leave to file another amended complaint.
Because this litigation is still at this early stage, we cannot reasonably estimate the likelihood of an unfavorable outcome or the magnitude
of such an outcome, if any.
Shareholder Derivative
In 2018, five
shareholder derivative actions were filed on behalf of the Company. The complaints in each of these actions contain allegations similar
to the allegations set forth in the shareholder class action complaint pending in the United States District Court for the District of
New Jersey and seek recovery against the Company and certain of the Company’s officers and directors and an investor for alleged
claims including breaches of fiduciary duty, aiding and abetting breaches of fiduciary duty, unjust enrichment, waste of corporate assets,
abuse of control, and mismanagement. Each of the complaints also seek unspecified monetary damages and corporate governance changes. All
of the cases have been stayed pending resolution of the motion to dismiss in the securities class action pending in the United States
District Court for the District of New Jersey, except for one matter (Jackson v. Riot Blockchain, Inc., et al., Case No. 604520/18,
Supreme Court of the State of New York, County of Nassau) in which the court has adjourned the preliminary conference until June 21, 2022
in lieu of staying the action. Defendants do not anticipate any other activity on this case until the next preliminary conference.
Defendants intend to vigorously contest plaintiffs’ allegations
in the shareholder derivative actions and plaintiffs’ right to bring the action in the name of Riot Blockchain. But because this
litigation is still at this early stage, we cannot reasonably estimate the likelihood of an unfavorable outcome or the magnitude of such
an outcome, if any.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 17. Segment Information
The Company applies ASC 280, Segment Reporting,
in determining its reportable segments. The Company has three reportable segments: Mining, Hosting, and Engineering. The guidance requires
that segment disclosures present the measure(s) used by the CODM to decide how to allocate resources and for purposes of assessing such
segments’ performance. The Company’s CODM is comprised of several members of its executive management team who use revenue
and cost of revenues of our three reporting segments to assess the performance of the business of our reportable operating segments.
No operating segments have been aggregated
to form the reportable segments. The Company does not allocate all assets to the reporting segments as these are managed on an entity-wide
basis. Therefore, the Company does not separately disclose the total assets of its reportable operating segments. $29.4 million of goodwill
from the ESS Metron acquisition is allocated to our Engineering segment and $319.7 million of goodwill from the Whinstone Acquisition
is allocated to our Hosting segment.
The Mining segment generates revenue from the
Bitcoin the Company earns through its mining activities. The Hosting segment generates revenue from long-term customer contracts for the
provision/consumption of electricity, construction of infrastructure, operation of data centers and maintenance/management of computing
capacity from the Company’s data center facility in Rockdale, Texas. The Engineering segment generates revenue through customer
contracts for custom engineered electrical products.
The Hosting segment purchases custom engineered
electrical products from the Engineering segment in the ordinary course of business. Effective January 1, 2022, the Mining segment entered
into a colocation services agreement with the Hosting segment whereby the Mining segment is charged a base colocation fee per miner deployed
at Whinstone plus a performance fee calculated as a percentage of gross mining profit. The revenue and cost of revenues from intersegment
transactions have been eliminated in the consolidated statements of operations in accordance with U.S. GAAP. For purposes of segment reporting,
the revenues and cost of revenues for each segment are presented in the table below on a stand-alone basis, with the intersegment eliminations
presented separately, such that total revenue and total cost of revenues total to the consolidated statements of operations. All other
revenues are from external customers. No single third-party customer or related group of third-party customers contributed 10% or more
of the Company’s total consolidated revenue during the three months ended March 31, 2022 and 2021. However, two customers accounted
for nearly all of the Company’s third-party Hosting revenue.
For the three months ended March 31, 2022,
approximately 57% of the Company’s mining revenue was generated from our Whinstone Facility in Rockdale, Texas, and the remaining
43% was generated from the Coinmint Facility in New York.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The following table details revenue and cost
of revenues for the Company's reportable segments for the three months ended March 31, 2022 and 2021, and reconciles to net income (loss)
on the unaudited condensed consolidated statements of operations:
| |
Three months ended March 31, | |
| |
2022 | | |
2021 | |
Reportable segment revenue: | |
| | | |
| | |
Revenue, net - mining | |
$ | 57,945 | | |
$ | 23,173 | |
Revenue, net - hosting | |
| 21,039 | | |
| — | |
Revenue, net - engineering | |
| 15,238 | | |
| — | |
Other revenue | |
| 24 | | |
| 24 | |
Eliminations | |
| (14,459 | ) | |
| — | |
Total segment and consolidated revenue | |
| 79,787 | | |
| 23,197 | |
Reportable segment cost of revenues (exclusive of depreciation and amortization shown below): | |
| | | |
| | |
Cost of revenues - mining | |
| 23,931 | | |
| 7,534 | |
Cost of revenues - hosting | |
| 21,492 | | |
| — | |
Cost of revenues - engineering | |
| 13,552 | | |
| — | |
Eliminations | |
| (13,347 | ) | |
| — | |
Total segment and consolidated cost of revenues (exclusive of depreciation and amortization shown below) | |
| 45,628 | | |
| 7,534 | |
Reconciling Items: | |
| | | |
| | |
Selling, general and administrative | |
| (10,910 | ) | |
| (5,462 | ) |
Depreciation and amortization | |
| (14,245 | ) | |
| (2,846 | ) |
Change in fair value of derivative asset | |
| 46,235 | | |
| — | |
Change in fair value of contingent consideration | |
| (176 | ) | |
| — | |
Realized gain on sale/exchange of cryptocurrencies | |
| 9,236 | | |
| — | |
Impairment of cryptocurrencies | |
| (26,390 | ) | |
| — | |
Interest and other income (expense) | |
| (357 | ) | |
| 175 | |
Unrealized loss on marketable equity securities | |
| (1,611 | ) | |
| — | |
Current income tax expense | |
| (312 | ) | |
| — | |
Net income | |
$ | 35,629 | | |
$ | 7,530 | |
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note 18. Subsequent Events
Acquisition of Corsicana Facility Land Site:
Subsequent to March 31, 2022, the Company
announced that it has initiated a large-scale development to expand its Bitcoin mining and hosting capabilities in Navarro County, Texas
with the acquisition of the 265-acre site where the anticipated 1 GW Corsicana Facility will be constructed. The initial development phase
of the Corsicana Facility involves the development of 400 MW of Bitcoin mining capacity on the 265-acre site dedicated to immersion-cooled
Bitcoin mining and hosting, with operations expected to commence following completion of construction in July 2023.
This first phase of
the development of the Corsicana Facility includes land acquisition, site preparation, substation development, transmission construction,
along with construction of ancillary buildings and four buildings utilizing the Company’s immersion-cooling infrastructure and technology.
The Company estimates that the total cost of the first phase of the Expansion will be approximately $333 million, which is scheduled to
be invested over the remainder of 2022, 2023, and the first quarter of 2024.
Sales of Common Stock:
Subsequent to March 31, 2022, in connection
with the Company’s 2022 ATM Offering (see Note 2. “Liquidity and Financial Condition” to these unaudited Notes to Condensed
Consolidated Financial Statements), the Company received net proceeds of approximately $140.3 million from the sale of 9.9 million shares
of common stock.
Employee Equity Grants:
Subsequent to March 31, 2022, the Company
granted 382,080 restricted stock units at a fair value of approximately $6.1 million under the 2019 Equity Plan, including: (a)
184,680 service-based RSUs with a fair value of approximately $3.0 million, which are eligible to vest in quarterly tranches following
the grant date, subject to the recipient’s continued employment with the Company through the vesting date; and (b) 197,400 performance-based
RSUs with a fair value of approximately $3.1 million, which are eligible to vest based on the Company’s achievement of certain
performance objectives, as specified under the performance-based restricted stock unit plan adopted on August 12, 2021 under the 2019
Equity Plan.
Subsequent to March 31, 2022, 36,156 shares
of common stock were issued to the Company’s officers and employees in settlement of an equal number of fully vested restricted
stock units awarded to such individuals by the Company pursuant to grants made under the Company’s 2019 Equity Plan. The Company
withheld 7,277 of these shares at a fair value of approximately $0.1 million, in satisfaction of withholding taxes related
to the settlement of these vested restricted stock units, as permitted by the 2019 Equity Plan and approved by the Compensation Committee
of the Company’s Board of Directors.
Sale of Bitcoin:
Subsequent to March 31, 2022, the Company sold 250 Bitcoin at an average
sales price of approximately $40,056 for proceeds of approximately $10.0 million and an estimated gain on sale of $8.4 million.