UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
OR
☐ TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 001-33675
| | Riot Blockchain, Inc. | | |
| | (Exact name of registrant as specified in its charter) | | |
Nevada | | 84-1553387 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| 3855 Ambrosia Street, Suite 301, Castle Rock, CO 80109 | |
| (Address of principal executive offices) (Zip Code) | |
| | |
| (303) 794-2000 | |
| (Registrant’s telephone number, including area code) | |
| | |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: | | Trading Symbol(s): | | Name of each exchange on which registered: |
Common Stock, no par value per share | | RIOT | | Nasdaq Capital Market |
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has
submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒
No ☐
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See
definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | ☒ | | Accelerated Filer | ☐ |
| Non-Accelerated Filer | ☐ | | Smaller Reporting Company | ☐ |
| Emerging Growth Company | ☐ | | | |
If an emerging growth company, indicate by check mark
if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
No ☒
The number of shares of no-par value common stock
outstanding as of November 4, 2022 was 167,296,911.
RIOT BLOCKCHAIN, INC.
RIOT BLOCKCHAIN, INC.
As used in this Quarterly Report on Form 10-Q
(this “Quarterly Report”), the terms “we,” “us,” “our,” the “Company,” the
“Registrant,” “Riot Blockchain, Inc.,” and “Riot” mean Riot Blockchain, Inc. and its consolidated
subsidiaries, unless otherwise indicated.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This Quarterly Report and the documents incorporated
by reference herein contain forward-looking statements that involve risks and uncertainties, including those discussed under the heading
“Risk Factors” in this Quarterly Report and under similar headings in the other filings we make with the U.S. Securities and
Exchange Commission (the “SEC”), and are based on management’s assumptions and beliefs about the future that may not
materialize or prove to be correct, which could cause our results to differ materially from those expressed in or implied by such forward-looking
statements. All statements contained in this Quarterly Report and the documents incorporated by reference herein other than statements
of historical fact, such as those set forth under Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” of this Quarterly Report, are statements that could be deemed forward-looking statements. Such forward-looking
statements may include, without limitation, statements concerning: our plans, strategies and objectives for future operations; new equipment,
systems, technologies, services or developments, such as our investment in our development and implementation of industrial-scale immersion-cooled
Bitcoin mining hardware and our planned one gigawatt data center development in Corsicana, Texas; future economic conditions, performance
or outlook; future political conditions; the outcome of contingencies; potential acquisitions or divestitures; the number and value of
Bitcoin rewards we earn from our mining operations; expected cash flows or capital expenditures; our beliefs or expectations; activities,
events or developments that we intend, expect, project, believe or anticipate will or may occur in the future; and our assumptions and
beliefs underlying or based upon any of the foregoing. Forward-looking statements are made in reliance on the safe harbor provisions of
Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”), Section 21E of the Securities Exchange Act
of 1934, as amended, (the “Exchange Act”) and the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements
may be identified by their use of forward-looking terminology, such as “believes,” “expects,” “may,”
“should,” “would,” “will,” “intends,” “plans,” “estimates,” “anticipates,”
“projects,” or the negative of these words, and similar words or expressions. However, the absence of these words or similar
expressions does not mean that a statement is not forward-looking, and you should consider any statement contained in this Quarterly Report
or the documents incorporated by reference herein other, than statements of historical fact, to be a “forward-looking statement”
within the meaning of this cautionary note. You should not place undue reliance on these forward-looking statements, which reflect our
management’s opinions only as of the date such statements are made and are not guarantees of future performance or actual results.
The following are some of the risks, factors and uncertainties which we believe could cause our actual results to differ materially from
our historical results or our current expectations or projections expressed in or underlying such forward-looking statements:
• our strategic
decision to concentrate on Bitcoin mining ties the success of our business to the success of Bitcoin;
• our Bitcoin mining operations are capital-intensive and can only be successful
if our mining costs are lower than the value of the Bitcoin we mine, which has historically been subject to significant price volatility;
therefore, our ability to make accurate projections about our business and future contingencies is significantly impaired as a result
of this price volatility and other risks that lie largely outside of our control, such as our suppliers’ inability to perform or
timely deliver new miners, parts, or services we purchase from them, as well as other risks we may not anticipate;
• our
Bitcoin mining operations are subject to unique industry risks outside of our control that could have material adverse effects on our
business, including, among others: our need for significant amounts of low-cost and reliable electricity; changes to laws and regulations
pertaining to mining, transacting in, or holding Bitcoin; the historical volatility in the demand for, and the price of, Bitcoin; changes
in the public perception of Bitcoin; our need for consistent, high-speed, and highly secure Internet connectivity; intense competition
for new miners and the necessary infrastructure, personnel, material and components to support industrial-scale Bitcoin mining operations;
cybersecurity risks; increased global Bitcoin network hash rate and difficulty; and competition for a fixed supply of Bitcoin rewards;
• we have
made significant investments in our development of industrial-scale immersion-cooled Bitcoin mining infrastructure, which is subject
to unique risks and uncertainties, and if we are unable to effectively implement this innovative technology because of these risks or
other factors, we may not realize the benefits we anticipate from our substantial investment in immersion-cooled Bitcoin mining on the
schedule we anticipate, if at all;
• our Bitcoin mining operations are concentrated in discrete locations, and
a natural disaster, unforeseen environmental issues, or other significant disruption affecting our facilities could severely impact our
ability to operate, which could have a material adverse effect on our business, results of operations, financial condition, and the market
price of our securities;
• we cannot
predict the consequences of future geo-political events, such as international conflict and related sanctions, COVID-19 and the ongoing
global supply chain crisis that has resulted, to our business, our suppliers, and the markets in which we operate, which significantly
impairs our ability to make accurate projections of future revenues, costs, and risks, and we may be unable to properly insure against
these risks as a result;
• the growing
public awareness of climate change and the negative media attention given to the energy consumption of proof-of-work cryptography may
lead to the implementation of new taxes, laws and regulations affecting our access to energy, a decline in the demand for new Bitcoin,
or other factors that could have a material adverse effect on our business, results of operations, and the market price of our securities,
regardless of our efforts to control the climate impact of our operations;
• we may be required to record a significant charge to earnings if the value
of our amortizable intangible assets, or Bitcoin holdings become impaired due to a change in circumstances indicating that the carrying
value of these assets may not be recoverable, such as a sustained decline in the value of a Bitcoin from the value recorded when we mined
it, a decline in our stock price and market capitalization, reduced future cash flow estimates, and other changes to our industry and
the macroeconomic environment in which we operate;
• we have
made, and expect to continue to make, strategic acquisitions and investments, including our recent decision to develop a second large-scale
Bitcoin mining and data center facility in Corsicana, Texas, which entail significant risks and uncertainties that could adversely affect
our business, results of operations, and financial condition, such as unforeseen difficulties in integrating the operations of an acquired
business into our own, and we may fail to realize the anticipated benefits of these acquisitions on the schedule we expect, if at all;
• we expect
to need to raise additional capital, in the form of equity or debt, to fund our business objectives, goals, and strategies; however, volatility
in the trading price of shares of our common stock, the number of authorized shares available for issuance and the price of Bitcoin may jeopardize our ability to raise the necessary additional
capital;
• we could
be negatively impacted by a security breach, through cyber-attack, cyber-intrusion, insider threats or otherwise, or other significant
disruption of our information technology networks and related systems;
• global
macroeconomic conditions have given rise to significantly increased competition for labor, and we may be unable to hire the qualified
and talented personnel we need for our operations and to carry out our business strategy, or to retain our workforce without substantially
increasing our compensation and other benefits, which could increase our operating costs significantly;
• our reputation
and ability to do business may be impacted by the improper conduct of our employees, agents or business partners; and
• the outcome of litigation and other disputes in which we are involved from
time to time is unpredictable, and an adverse decision in any such matter could have a material adverse effect on our financial condition,
results of operations, cash flows and equity.
Additional details and discussions concerning
some of the various risks, factors and uncertainties that could cause future results to differ materially from those expressed or implied
in our forward-looking statements are set forth under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report
and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021, as amended (the “2021 Annual Report”),
as well as those which may be disclosed in current reports on Form 8-K and other subsequent filings we make with the SEC. The foregoing
list of factors and the factors set forth under the heading “Risk Factors” included in our 2021 Annual Report, this Quarterly
Report, and the other filings we make with the SEC are not exhaustive. Additional risks and uncertainties not known to us or that we currently
believe not to be material may adversely impact our business, financial condition, results of operations and cash flows. It is not possible
for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor,
or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may
make. Should any risks or uncertainties develop into actual events, these developments could have a material adverse effect on our business,
financial condition, results of operations and cash flows.
Accordingly, you should read this
Quarterly Report completely and with the understanding that our actual future results may be materially different from our
historical results and also from those expressed in or implied by the forward-looking statements contained in this Quarterly Report
and the documents incorporated by reference herein. The forward-looking statements contained in this Quarterly Report and the
documents incorporated by reference herein speak only as of the date they are made and, unless otherwise required by applicable
securities laws, we disclaim any intention or obligation to update or revise any such forward-looking statements, whether as a
result of new information, future events or otherwise. All forward-looking statements attributable to us are expressly qualified by
these cautionary statements.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Riot Blockchain, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except for share and per share amounts)
| |
September 30, 2022 | | |
December 31, 2021 | |
ASSETS | |
| (Unaudited) | | |
| | |
Current assets | |
| | | |
| | |
Cash and cash equivalents | |
$ | 254,974 | | |
$ | 312,315 | |
Accounts receivable | |
| 17,385 | | |
| 15,398 | |
Costs and estimated earnings in excess of billings | |
| 15,119 | | |
| 9,862 | |
Prepaid expenses and other current assets | |
| 22,100 | | |
| 7,135 | |
Bitcoin | |
| 125,151 | | |
| 159,544 | |
Future power credits, current portion | |
| 39,996 | | |
| 58,481 | |
Investments in marketable equity securities, at fair value | |
| 2,170 | | |
| 10,804 | |
Total current assets | |
| 476,895 | | |
| 573,539 | |
Property and equipment, net | |
| 650,191 | | |
| 276,480 | |
Deposits | |
| 178,502 | | |
| 266,170 | |
Intangible assets, net | |
| 13,017 | | |
| 14,162 | |
Goodwill | |
| — | | |
| 335,563 | |
Derivative asset | |
| 112,944 | | |
| 26,079 | |
Right of use assets | |
| 21,763 | | |
| 13,189 | |
Future power credits, less current portion | |
| — | | |
| 25,447 | |
Other long-term assets | |
| 310 | | |
| 310 | |
Total assets | |
$ | 1,453,622 | | |
$ | 1,530,939 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | | |
| | |
Current liabilities | |
| | | |
| | |
Accounts payable | |
$ | 12,664 | | |
$ | 20,037 | |
Billings in excess of costs and estimated earnings | |
| 11,229 | | |
| 5,264 | |
Accrued compensation | |
| 5,190 | | |
| 5,927 | |
Accrued expenses | |
| 33,725 | | |
| 16,144 | |
Deferred revenue, current portion | |
| 2,555 | | |
| 2,843 | |
Contingent consideration liability - future power credits, current portion | |
| 39,996 | | |
| 58,481 | |
Operating lease liability, current portion | |
| 1,699 | | |
| 1,182 | |
Total current liabilities | |
| 107,058 | | |
| 109,878 | |
| |
| | | |
| | |
Deferred revenue, less current portion | |
| 18,364 | | |
| 19,796 | |
Operating lease liability, less current portion | |
| 20,510 | | |
| 12,257 | |
Contingent consideration liability - future power credits, less current portion | |
| — | | |
| 25,447 | |
Other long-term liabilities | |
| 8,319 | | |
| 6,241 | |
Total liabilities | |
| 154,251 | | |
| 173,619 | |
| |
| | | |
| | |
Commitments and contingencies - Note 16 | |
| | | |
| | |
| |
| | | |
| | |
Stockholders' equity | |
| | | |
| | |
Preferred stock, no par value, 15,000,000 shares authorized: | |
| | | |
| | |
2% Series A Convertible stock, 2,000,000 shares authorized; no shares issued and outstanding as of September 30, 2022 and December 31, 2021 | |
| — | | |
| — | |
0% Series B Convertible stock, 1,750,001 shares authorized; no shares issued and outstanding as of September 30, 2022 and 2,199 shares issued and outstanding as of December 31, 2021, liquidation preference over common stock, equal to carrying value | |
| — | | |
| 11 | |
Common stock, no par value; 170,000,000 shares authorized; 167,296,912 and 116,748,472 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively | |
| 1,890,983 | | |
| 1,595,147 | |
Accumulated deficit | |
| (591,612 | ) | |
| (237,838 | ) |
Total stockholders' equity | |
| 1,299,371 | | |
| 1,357,320 | |
Total liabilities and stockholders' equity | |
$ | 1,453,622 | | |
$ | 1,530,939 | |
See the accompanying Notes to Condensed Consolidated
Financial Statements,
which are an integral part of these Condensed Consolidated Financial Statements.
Riot Blockchain, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except for share and per share amounts)
(Unaudited)
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Revenue, net: | |
| | | |
| | | |
| | | |
| | |
Mining | |
$ | 22,070 | | |
$ | 53,590 | | |
$ | 126,166 | | |
$ | 108,213 | |
Data Center Hosting | |
| 8,371 | | |
| 11,193 | | |
| 27,899 | | |
| 14,067 | |
Engineering | |
| 15,824 | | |
| — | | |
| 44,886 | | |
| — | |
Other revenue | |
| 25 | | |
| 25 | | |
| 73 | | |
| 73 | |
Total revenue | |
| 46,290 | | |
| 64,808 | | |
| 199,024 | | |
| 122,353 | |
| |
| | | |
| | | |
| | | |
| | |
Costs and expenses: | |
| | | |
| | | |
| | | |
| | |
Cost of revenues (exclusive of depreciation and amortization shown below): | |
| | | |
| | | |
| | | |
| | |
Mining | |
| 14,677 | | |
| 13,034 | | |
| 51,766 | | |
| 29,893 | |
Data Center Hosting | |
| 14,223 | | |
| 12,581 | | |
| 44,392 | | |
| 16,317 | |
Engineering | |
| 13,780 | | |
| — | | |
| 40,504 | | |
| — | |
Acquisition-related costs | |
| — | | |
| 552 | | |
| 78 | | |
| 18,894 | |
Selling, general and administrative | |
| 16,004 | | |
| 40,307 | | |
| 37,549 | | |
| 47,971 | |
Depreciation and amortization | |
| 26,559 | | |
| 12,207 | | |
| 61,366 | | |
| 20,791 | |
Change in fair value of derivative asset | |
| 17,749 | | |
| (7,413 | ) | |
| (86,865 | ) | |
| (23,806 | ) |
Power curtailment credits | |
| (13,070 | ) | |
| (2,507 | ) | |
| (21,328 | ) | |
| (3,650 | ) |
Change in fair value of contingent consideration | |
| — | | |
| 259 | | |
| 176 | | |
| 444 | |
Realized gain on sale/exchange of Bitcoin | |
| (1,854 | ) | |
| (65 | ) | |
| (25,443 | ) | |
| (94 | ) |
Gain on exchange of equipment | |
| (7,667 | ) | |
| — | | |
| (16,281 | ) | |
| — | |
Impairment of Bitcoin | |
| 5,900 | | |
| — | | |
| 132,077 | | |
| 17,507 | |
Impairment of goodwill | |
| — | | |
| — | | |
| 335,648 | | |
| — | |
Total costs and expenses | |
| 86,301 | | |
| 68,955 | | |
| 553,639 | | |
| 124,267 | |
Operating income (loss) | |
| (40,011 | ) | |
| (4,147 | ) | |
| (354,615 | ) | |
| (1,914 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other income (expense): | |
| | | |
| | | |
| | | |
| | |
Interest income (expense) | |
| 348 | | |
| 40 | | |
| (9 | ) | |
| 295 | |
Realized loss on sale of marketable equity securities | |
| — | | |
| — | | |
| (1,624 | ) | |
| | |
Realized gain on sale/exchange of long-term investment | |
| — | | |
| — | | |
| — | | |
| 26,260 | |
Unrealized gain (loss) on marketable equity securities | |
| 142 | | |
| (11,151 | ) | |
| (6,306 | ) | |
| (10,812 | ) |
Other income (expense) | |
| — | | |
| (85 | ) | |
| (59 | ) | |
| 1,425 | |
Total other income (expense) | |
| 490 | | |
| (11,196 | ) | |
| (7,998 | ) | |
| 17,168 | |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) before taxes | |
| (39,521 | ) | |
| (15,343 | ) | |
| (362,613 | ) | |
| 15,254 | |
| |
| | | |
| | | |
| | | |
| | |
Current income tax benefit (expense) | |
| (89 | ) | |
| — | | |
| (828 | ) | |
| — | |
Deferred income tax benefit (expense) | |
| 3,041 | | |
| — | | |
| 9,667 | | |
| (3,730 | ) |
Total income tax benefit (expense) | |
| 2,952 | | |
| — | | |
| 8,839 | | |
| (3,730 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) | |
$ | (36,569 | ) | |
$ | (15,343 | ) | |
$ | (353,774 | ) | |
$ | 11,524 | |
| |
| | | |
| | | |
| | | |
| | |
Basic net income (loss) per share | |
$ | (0.24 | ) | |
$ | (0.16 | ) | |
$ | (2.64 | ) | |
$ | 0.13 | |
Diluted net income (loss) per share | |
$ | (0.24 | ) | |
$ | (0.16 | ) | |
$ | (2.64 | ) | |
$ | 0.13 | |
| |
| | | |
| | | |
| | | |
| | |
Basic weighted average number of shares outstanding | |
| 153,895,123 | | |
| 96,064,036 | | |
| 133,894,338 | | |
| 89,350,180 | |
Diluted weighted average number of shares outstanding | |
| 153,895,123 | | |
| 96,064,036 | | |
| 133,894,338 | | |
| 89,896,374 | |
See the accompanying Notes to Condensed Consolidated
Financial Statements,
which are an integral part of these Condensed Consolidated Financial Statements.
Riot Blockchain, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’
Equity
(in thousands, except for share and per share amounts)
(Unaudited)
Three Months Ended September 30, 2022
| |
| | |
| | |
| | |
| | |
| | |
Total | |
| |
Preferred Stock | | |
Common Stock | | |
Accumulated | | |
stockholders' | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
deficit | | |
equity | |
Balance as of July 1, 2022 | |
| — | | |
$ | — | | |
| 147,986,173 | | |
$ | 1,857,108 | | |
$ | (555,043 | ) | |
$ | 1,302,065 | |
Delivery of common stock underlying restricted stock units, net of shares settled for tax withholding settlement | |
| — | | |
| — | | |
| 330,279 | | |
| (1,058 | ) | |
| — | | |
| (1,058 | ) |
Issuance of restricted stock | |
| — | | |
| — | | |
| 12,487,665 | | |
| — | | |
| — | | |
| — | |
Issuance of common stock/At-the-market offering, net of offering costs | |
| — | | |
| — | | |
| 6,492,795 | | |
| 31,372 | | |
| — | | |
| 31,372 | |
Stock-based compensation | |
| — | | |
| — | | |
| — | | |
| 3,561 | | |
| — | | |
| 3,561 | |
Net loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| (36,569 | ) | |
| (36,569 | ) |
Balance as of September 30, 2022 | |
| — | | |
$ | — | | |
| 167,296,912 | | |
$ | 1,890,983 | | |
$ | (591,612 | ) | |
$ | 1,299,371 | |
Three Months Ended September 30, 2021
| |
| | |
| | |
| | |
| | |
| | |
Total | |
| |
Preferred Stock | | |
Common Stock | | |
Accumulated | | |
stockholders' | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
deficit | | |
equity | |
Balance as of July 1, 2021 | |
| 2,199 | | |
$ | 11 | | |
| 95,948,232 | | |
$ | 917,197 | | |
$ | (203,045 | ) | |
$ | 714,163 | |
Delivery of common stock underlying restricted stock units, net of shares settled for tax withholding settlement | |
| — | | |
| — | | |
| 30,367 | | |
| (475 | ) | |
| — | | |
| (475 | ) |
Issuance of common stock/At-the-market offering, net of offering costs | |
| — | | |
| — | | |
| 1,227,991 | | |
| 34,790 | | |
| — | | |
| 34,790 | |
Issuance of common stock warrant for settlement of advisory fees | |
| — | | |
| — | | |
| — | | |
| 1,157 | | |
| — | | |
| 1,157 | |
Stock-based compensation | |
| — | | |
| — | | |
| — | | |
| 36,023 | | |
| | | |
| 36,023 | |
Net loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| (15,343 | ) | |
| (15,343 | ) |
Balance as of September 30, 2021 | |
| 2,199 | | |
$ | 11 | | |
| 97,206,590 | | |
$ | 988,692 | | |
$ | (218,388 | ) | |
$ | 770,315 | |
See the accompanying Notes to Condensed Consolidated
Financial Statements,
which are an integral part of these Condensed Consolidated Financial Statements.
Riot Blockchain, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’
Equity
(in thousands, except for share and per share amounts)
(Unaudited)
Nine Months Ended September 30, 2022
| |
| | |
| | |
| | |
| | |
| | |
Total | |
| |
Preferred Stock | | |
Common Stock | | |
Accumulated | | |
stockholders' | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
deficit | | |
equity | |
Balance as of January 1, 2022 | |
| 2,199 | | |
$ | 11 | | |
| 116,748,472 | | |
$ | 1,595,147 | | |
$ | (237,838 | ) | |
$ | 1,357,320 | |
Delivery of common stock underlying restricted stock units, net of shares settled for tax withholding settlement | |
| — | | |
| — | | |
| 1,005,964 | | |
| (9,873 | ) | |
| — | | |
| (9,873 | ) |
Issuance of restricted stock | |
| — | | |
| — | | |
| 12,487,665 | | |
| — | | |
| — | | |
| — | |
Issuance of common stock/At-the-market offering, net of offering costs | |
| — | | |
| — | | |
| 37,052,612 | | |
| 298,394 | | |
| — | | |
| 298,394 | |
Conversion of preferred stock to common stock | |
| (2,199 | ) | |
| (11 | ) | |
| 2,199 | | |
| 11 | | |
| — | | |
| — | |
Stock-based compensation | |
| — | | |
| — | | |
| — | | |
| 7,304 | | |
| — | | |
| 7,304 | |
Net loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| (353,774 | ) | |
| (353,774 | ) |
Balance as of September 30, 2022 | |
| — | | |
$ | — | | |
| 167,296,912 | | |
$ | 1,890,983 | | |
$ | (591,612 | ) | |
$ | 1,299,371 | |
Nine Months Ended September 30, 2021
| |
| | |
| | |
| | |
| | |
| | |
Total | |
| |
Preferred Stock | | |
Common Stock | | |
Accumulated | | |
stockholders' | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
deficit | | |
equity | |
Balance as of January 1, 2021 | |
| 4,199 | | |
$ | 22 | | |
| 78,523,517 | | |
$ | 506,961 | | |
$ | (229,912 | ) | |
$ | 277,071 | |
Delivery of common stock underlying restricted stock units, net of shares settled for tax withholding settlement | |
| — | | |
| — | | |
| 260,271 | | |
| (1,794 | ) | |
| — | | |
| (1,794 | ) |
Issuance of common stock related to exercise of warrants | |
| — | | |
| — | | |
| 415,657 | | |
| 806 | | |
| — | | |
| 806 | |
Issuance of common stock for settlement of 1,257,235 warrants on a cashless basis | |
| — | | |
| — | | |
| 543,686 | | |
| — | | |
| — | | |
| — | |
Issuance of common stock in connection with the acquisition of Whinstone | |
| — | | |
| — | | |
| 11,800,000 | | |
| 326,152 | | |
| — | | |
| 326,152 | |
Issuance of common stock/At-the-market offering, net of offering costs | |
| — | | |
| — | | |
| 5,661,459 | | |
| 117,471 | | |
| — | | |
| 117,471 | |
Issuance of common stock warrant for settlement of advisory fees | |
| — | | |
| — | | |
| — | | |
| 1,157 | | |
| — | | |
| 1,157 | |
Conversion of preferred stock to common stock | |
| (2,000 | ) | |
| (11 | ) | |
| 2,000 | | |
| 11 | | |
| — | | |
| — | |
Stock-based compensation | |
| — | | |
| — | | |
| — | | |
| 37,928 | | |
| — | | |
| 37,928 | |
Net income | |
| — | | |
| — | | |
| — | | |
| — | | |
| 11,524 | | |
| 11,524 | |
Balance as of September 30, 2021 | |
| 2,199 | | |
$ | 11 | | |
| 97,206,590 | | |
$ | 988,692 | | |
$ | (218,388 | ) | |
$ | 770,315 | |
See the accompanying Notes to Condensed Consolidated
Financial Statements,
which are an integral part of these Condensed Consolidated Financial Statements.
Riot Blockchain, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
| |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | |
Cash flows from operating activities | |
| | | |
| | |
Net income (loss) | |
$ | (353,774 | ) | |
$ | 11,524 | |
Adjustments to reconcile net income (loss) to net cash used in operating
activities: | |
| | | |
| | |
Stock-based compensation | |
| 7,304 | | |
| 37,928 | |
Depreciation and amortization | |
| 61,366 | | |
| 20,791 | |
Amortization of license fee revenue | |
| (73 | ) | |
| (73 | ) |
Amortization of right of use assets | |
| 2,891 | | |
| (25 | ) |
Income tax (benefit) expense | |
| (8,839 | ) | |
| 3,730 | |
Issuance of common stock warrant for settlement of advisory fees | |
| — | | |
| 1,157 | |
Impairment of Bitcoin | |
| 132,077 | | |
| 17,507 | |
Impairment of goodwill | |
| 335,648 | | |
| — | |
Change in fair value of derivative asset | |
| (86,865 | ) | |
| (23,806 | ) |
Change in fair value of contingent consideration | |
| 176 | | |
| 444 | |
Realized loss on sale of marketable securities | |
| 1,624 | | |
| — | |
Realized gain on sale/exchange of long-term investment | |
| — | | |
| (26,260 | ) |
Realized gain on sale/exchange of Bitcoin | |
| (25,443 | ) | |
| (94 | ) |
Unrealized loss on marketable equity securities | |
| 6,306 | | |
| 10,812 | |
Gain on exchange of equipment | |
| (16,281 | ) | |
| — | |
Bitcoin - mining, net | |
| (124,732 | ) | |
| (108,100 | ) |
Changes in assets and liabilities: | |
| | | |
| | |
Proceeds from sale of Bitcoin | |
| 52,491 | | |
| — | |
Accounts receivable | |
| (1,987 | ) | |
| (2,559 | ) |
Costs and estimated earnings in excess of billings | |
| (5,257 | ) | |
| — | |
Prepaid expenses and other current assets | |
| (14,959 | ) | |
| (1,220 | ) |
Future power credits | |
| 43,932 | | |
| (444 | ) |
Accounts payable | |
| (7,373 | ) | |
| 1,080 | |
Billings in excess of costs and estimated earnings | |
| 5,965 | | |
| — | |
Accrued compensation | |
| (737 | ) | |
| 5,326 | |
Accrued expenses | |
| (1,936 | ) | |
| (1,946 | ) |
Customer deposits | |
| 2,078 | | |
| 6,120 | |
Deferred revenue | |
| (1,647 | ) | |
| (12,757 | ) |
Lease liability | |
| (2,695 | ) | |
| (9 | ) |
Net cash used in operating activities | |
| (740 | ) | |
| (60,874 | ) |
| |
| | | |
| | |
Cash flows from investing activities | |
| | | |
| | |
Proceeds from the sale of marketable equity securities | |
| 704 | | |
| — | |
Acquisition of Whinstone, net of cash acquired | |
| — | | |
| (40,879 | ) |
Proceeds from the sale of long-term investments | |
| — | | |
| 1,800 | |
Deposits on equipment | |
| (194,923 | ) | |
| (103,158 | ) |
Other deposits | |
| (5,479 | ) | |
| — | |
Purchases of property and equipment, including construction in progress | |
| (129,672 | ) | |
| (78,858 | ) |
Patent costs incurred | |
| (27 | ) | |
| (16 | ) |
Net cash used in investing activities | |
| (329,397 | ) | |
| (221,111 | ) |
| |
| | | |
| | |
Cash flows from financing activities | |
| | | |
| | |
Proceeds from the issuance of common stock / At-the-market offering | |
| 304,849 | | |
| 120,516 | |
Offering costs for the issuance of common stock / At-the-market offering | |
| (6,455 | ) | |
| (3,045 | ) |
Proceeds from exercise of common stock warrants | |
| — | | |
| 806 | |
Payments on contingent consideration liability - future power credits | |
| (15,725 | ) | |
| — | |
Repurchase of common shares to pay employee withholding taxes | |
| (9,873 | ) | |
| (1,794 | ) |
Net cash provided by financing activities | |
| 272,796 | | |
| 116,483 | |
| |
| | | |
| | |
Net decrease in cash and cash equivalents | |
| (57,341 | ) | |
| (165,502 | ) |
Cash and cash equivalents at beginning of period | |
| 312,315 | | |
| 223,382 | |
Cash and cash equivalents at end of period | |
$ | 254,974 | | |
$ | 57,880 | |
| |
| | | |
| | |
Supplemental disclosure of cash flow information: | |
| | | |
| | |
Cash paid for interest | |
$ | — | | |
$ | — | |
Cash paid for taxes | |
$ | — | | |
$ | — | |
| |
| | | |
| | |
Supplemental disclosure of noncash investing and financing activities: | |
| | | |
| | |
Issuance of common stock for business combination | |
$ | — | | |
$ | 326,152 | |
Reclassification of deposits to property and equipment | |
$ | 288,064 | | |
$ | 46,711 | |
Conversion of preferred stock to common stock | |
$ | 11 | | |
$ | 11 | |
Property and equipment obtained in exchange transaction | |
$ | 10,409 | | |
$ | — | |
Construction in progress included in accrued expenses | |
$ | 9,979 | | |
$ | 1,787 | |
See the accompanying
Notes to Condensed Consolidated Financial Statements,
which are an integral part of these Condensed Consolidated Financial Statements.
Riot Blockchain, Inc. and Subsidiaries
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 “Rockdale
Facility”). The Rockdale Facility currently provides 700 megawatts in total capacity. Our Rockdale 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. Additionally, we 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 of capacity available for both our
Bitcoin mining operations and hosting of institutional-scale Bitcoin mining and data center clients upon completion.
We operate in an environment that is constantly
evolving based on the proliferation of Bitcoin and cryptocurrencies in general. A significant component of our strategy is to effectively
and efficiently allocate capital among opportunities that generate the highest return on our investment.
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 (“Data Center Hosting”), and (3) Electrical Products and Engineering (“Engineering”).
Note 2. Liquidity and Financial Condition
At September 30, 2022, the Company had approximate
balances of cash and cash equivalents of $255.0 million, working capital of $369.8 million, total stockholders’ equity of $1.3 billion
and an accumulated deficit of $591.6 million. To date, the Company has, in large part, relied on equity financings to fund its operations.
During the nine months ended September 30, 2022, the Company sold 1,925 Bitcoin for proceeds of approximately $52.5 million. The Company
monitors 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 have a positive 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 one year from the date these unaudited condensed consolidated
financial statements are issued.
During the nine months ended September 30,
2022, the Company paid approximately $194.9 million as deposits primarily for miners and reclassified $288.1 million of deposits to property
and equipment in connection with the deployment of miners at the Rockdale Facility. As of September 30, 2022, all 55,728 of the Company’s
miners were located at the Rockdale Facility.
2022 ATM Offering:
As disclosed in Note 13, “Stockholders’ Equity”, 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 paid 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 September 30, 2022, the Company had
received net proceeds of approximately $298.4 million (after deducting $6.5 million in commissions and expenses) on sales of 37,052,612 shares of common stock under the Sales Agreement at a weighted average price of $8.23 per share.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
COVID-19:
The COVID-19 global pandemic has been unprecedented and unpredictable; there
continues to be widespread impact resulting from the COVID-19 pandemic and this 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 impact of COVID-19 on global logistics discussed below. We continue to monitor this situation and the possible effects on our
financial condition, liquidity, operations, suppliers, and industry.
In addition, nationally, we have experienced
and are experiencing varying degrees of inflation, resulting in part from various supply chain disruptions, increased shipping and transportation
costs, and increased raw material and labor costs as well as other disruptions resulting from the continuing COVID-19 pandemic and general
global economic conditions. This inflationary impact on our cost structure has contributed to adjustments in operations and our ability
to obtain materials and retain talent, despite a continued focus on reducing our costs where possible.
Global Logistics:
Ongoing 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 delivery delays to avoid
materially impacting our miner deployment schedule; however, there are no assurances we will be able to continue to mitigate delivery
delays in the future. Additionally, the expansion of the Rockdale 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. In anticipation of the development of the Corsicana Facility, we have procured and hold much of the required materials to help
mitigate against global supply logistic and pricing issues. We also monitor developments in the global supply chain on an ongoing basis
and make efforts to determine 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 in 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 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 2021 Annual Report.
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.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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.
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 had three operating segments as of September 30, 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.
During the three and nine months ended September
30, 2022, the deferred income tax benefit of $3.0 million and $9.7 million, respectively, related primarily to the contingent consideration
liability and future power credits. During the three and nine months ended September 30, 2021, the deferred income tax expense of zero
and $3.7 million, respectively, related primarily to temporary differences between financial statement carrying amounts of existing assets
and liabilities and their respective tax bases.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Income (Loss) Per Share:
Basic net income (loss) 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 shares of stock-based compensation 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 basic and diluted net
income (loss) per share calculation.
For the nine months ended September 30, 2021,
the Company recorded net income and therefore, EPS was calculated using the treasury stock method. Dilutive potential common shares include
outstanding stock options, unvested shares of stock-based compensation, 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 nine
months ended September 30, 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.
The following is a reconciliation of
the numerator and denominator of the diluted net income (loss) per share computations for the periods presented below (in thousands except
for share and per share amounts):
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Basic and diluted income (loss) per share: | |
| | | |
| | | |
| | | |
| | |
Net income (loss) | |
$ | (36,569 | ) | |
$ | (15,343 | ) | |
$ | (353,774 | ) | |
$ | 11,524 | |
| |
| | | |
| | | |
| | | |
| | |
Basic weighted average number of shares outstanding | |
| 153,895,123 | | |
| 96,064,036 | | |
| 133,894,338 | | |
| 89,350,180 | |
Add: | |
| | | |
| | | |
| | | |
| | |
Options to purchase common stock | |
| — | | |
| — | | |
| — | | |
| 10,640 | |
Unvested stock-based compensation | |
| — | | |
| — | | |
| — | | |
| 533,220 | |
Convertible Series B preferred shares | |
| — | | |
| — | | |
| — | | |
| 2,334 | |
Diluted weighted average number of shares outstanding | |
| 153,895,123 | | |
| 96,064,036 | | |
| 133,894,338 | | |
| 89,896,374 | |
| |
| | | |
| | | |
| | | |
| | |
Basic net income (loss) per share | |
$ | (0.24 | ) | |
$ | (0.16 | ) | |
$ | (2.64 | ) | |
$ | 0.13 | |
| |
| | | |
| | | |
| | | |
| | |
Diluted net income (loss) per share | |
$ | (0.24 | ) | |
$ | (0.16 | ) | |
$ | (2.64 | ) | |
$ | 0.13 | |
Securities that could potentially dilute
income (loss) per share in the future were not included in the computation of diluted income (loss) per share at September 30, 2022 and
2021 because their inclusion would be anti-dilutive are as follows:
| | September 30, 2022 | | | September 30, 2021 | |
Warrants to purchase common stock | | | 63,000 | | | | 63,000 | |
Options to purchase common stock | | | — | | | | 12,000 | |
Unvested restricted stock units | | | 2,286,701 | | | | 4,224,016 | |
Unvested restricted stock awards | | | 12,478,290 | | | | — | |
Convertible Series B preferred stock | | | — | | | | 2,199 | |
Total | | | 14,827,991 | | | | 4,301,215 | |
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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.
Note 4. Acquisitions
Acquisition of ESS Metron:
On December 1, 2021 (the “ESS Metron
Acquisition Date”), the Company acquired 100% of the equity interests of ESS Metron, LLC (“ESS Metron”). ESS Metron
is a power distribution and management systems manufacturing, design and engineering firm based in Denver, Colorado, operating from facilities
totaling approximately 121,000 square feet of manufacturing, office and warehouse space in the metropolitan Denver area. These facilities
are subject to long-term lease agreements. The acquisition of ESS Metron established the Company’s Engineering business and is expected
to enhance the Company’s ability to scale its Bitcoin mining and data center hosting business as planned.
The ESS Metron 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 the 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 ESS Metron 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 “Whinstone Acquisition Date”), the Company acquired 100% of the equity interests of Whinstone US, Inc. (“Whinstone”), the owner and operator of a Bitcoin mining and data center hosting facility, for approximately $460 million (the “Whinstone Acquisition”). The assets, operations and skilled workforce of Whinstone immediately increased the scale and scope of Riot’s operations, and is a foundational element in the Company’s strategy to grow its industry-leading, vertically-integrated Bitcoin mining platform on a global scale.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Whinstone 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 former parent, Northern Data AG (the “Whinstone Seller”), totaling approximately
$38 million was repaid and certain Whinstone Seller transaction costs were paid. The Company also agreed to pay Whinstone Seller up to
approximately $86 million (undiscounted) in additional consideration if certain future power credits are realized by Whinstone.
Other than the impairment charge to goodwill
described below, 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 finalized the valuation of these assets and liabilities, and consideration transferred, in May
of 2022.
Impairment of Goodwill:
In response to recent adverse changes in business
climate, including decreases in the price of Bitcoin and the related volatility of equity markets, including the Bitcoin mining industry,
as evidenced by declines in the market price of the Company’s securities, those of its peers, and major market indices, during the
nine months ended September 30, 2022, the Company recognized a non-cash impairment charge of $335.6 million to completely write off
the Company’s balance of goodwill related to the Whinstone Acquisition and the ESS Metron Acquisition. See Note 9. “Intangible
Assets and Goodwill” to the Notes to the Condensed Consolidated Financial Statements.
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 acquisitions.
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 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 September 30, 2021 | | |
Nine Months Ended September 30, 2021 | |
Total revenue | |
$ | 64,807 | | |
$ | 132,693 | |
Net income | |
$ | (12,136 | ) | |
$ | 115,326 | |
Acquisition of Corsicana Facility Land
Site:
During the nine months ended September 30, 2022,
the Company announced that it has initiated a large-scale development to expand its Bitcoin mining and data center hosting capabilities
in Navarro County, Texas with the acquisition of the 265-acre site where the anticipated one-gigawatt Corsicana Facility will be constructed.
The initial phase of the development of the Corsicana Facility involves the construction on the 265-acre site of 400 megawatts of immersion-cooled
Bitcoin mining and data center hosting infrastructure spread across multiple buildings, as well as a high-voltage power substation and
transmission facilities to supply power to the facility. Construction of the substation and the data centers is expected to be carried
out concurrently, with self-mining and data center hosting operations expected to commence by the fourth quarter of 2023, following the
commissioning of the substation, which is expected to be completed in summer 2023.
This first phase of the development of the Corsicana Facility includes land acquisition, site preparation, substation development, and transmission construction, along with construction of ancillary buildings and four buildings utilizing the Company’s immersion-cooling infrastructure and technology. Through September 30, 2022, the Company has incurred costs of approximately $30 million related to the development of the Corsicana Facility, including $10 million for land, $15 million of initial developments costs and a $5 million deposit for future power usage.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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):
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Mining | |
$ | 22,070 | | |
$ | 53,590 | | |
$ | 126,166 | | |
$ | 108,213 | |
Data center hosting | |
| 8,371 | | |
| 11,193 | | |
| 27,899 | | |
| 14,067 | |
Engineering | |
| 15,824 | | |
| — | | |
| 44,886 | | |
| — | |
Other | |
| 25 | | |
| 25 | | |
| 73 | | |
| 73 | |
Total revenue | |
$ | 46,290 | | |
$ | 64,808 | | |
$ | 199,024 | | |
$ | 122,353 | |
Contract balances:
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
$15.1 million and $9.9 million as of September 30, 2022 and December 31, 2021, respectively.
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.
Beginning balance - January 1, 2022 | |
$ | 27,903 | |
Revenue recognized | |
| (1,720 | ) |
Billings in excess of costs and estimated earnings | |
| 5,965 | |
Ending balance - September 30, 2022 | |
$ | 32,148 | |
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.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 6. Bitcoin
The following table presents additional information about the Company’s
Bitcoin:
Beginning balance - January 1, 2022 | |
$ | 159,544 | |
Revenue recognized from Bitcoin mined | |
| 126,166 | |
Proceeds from sale of Bitcoin | |
| (52,491 | ) |
Exchange of Bitcoin for employee compensation | |
| (1,434 | ) |
Realized gain on sale/exchange of Bitcoin | |
| 25,443 | |
Impairment of Bitcoin | |
| (132,077 | ) |
Ending balance - September 30, 2022 | |
$ | 125,151 | |
Note 7. Investments in Marketable Equity Securities
On June 28, 2022, the Company sold 800,000 shares of Mogo Inc. (“Mogo”)
at a net sales price of $0.88 per share, received proceeds of approximately $0.7 million and recognized a realized loss of approximately
$1.6 million. During the three months ended September 30, 2022, the Company recorded an unrealized gain of approximately $0.1 million
and during the nine months ended September 30, 2022, recorded an unrealized loss of $6.3 million on the remaining 2.4 million shares of
Mogo, based on the closing price per share of Mogo common stock on the Nasdaq Stock Market on September 30, 2022 of $0.92. During the
three and nine months ended September 30, 2021, the Company recorded unrealized losses of $11.2 million and $10.8 million, respectively,
on its original 3.2 million shares of Mogo. The daily share price of Mogo is extremely volatile and the value may be more or less than
the amount recorded as of September 30, 2022.
Note 8. Property and Equipment
Property and equipment:
Property and equipment consisted of the following as of
September 30, 2022 and December 31, 2021:
| |
Life (Years) | | |
September 30, 2022 | | |
December 31, 2021 | |
Buildings and building improvements | |
| 10-25 | | |
$ | 187,596 | | |
$ | 88,808 | |
Land rights and land improvements | |
| n/a | | |
| 10,089 | | |
| — | |
Miners and mining equipment | |
| 2 | | |
| 400,892 | | |
| 87,921 | |
Machinery and facility equipment | |
| 5-7 | | |
| 22,670 | | |
| 15,613 | |
Office and computer equipment | |
| 3 | | |
| 1,233 | | |
| 1,007 | |
Construction in progress | |
| | | |
| 107,744 | | |
| 113,598 | |
Total cost of property and equipment | |
| | | |
| 730,224 | | |
| 306,947 | |
Less accumulated depreciation | |
| | | |
| (80,033 | ) | |
| (30,467 | ) |
Property and equipment, net | |
| | | |
$ | 650,191 | | |
$ | 276,480 | |
As of September 30, 2022, the
Company had deployed a total of 55,728 miners in its mining operation, all at the Rockdale Facility.
During the nine months ended
September 30, 2022, the Company paid approximately $194.9 million as deposits, primarily for ASIC miners, which are scheduled to be shipped
monthly through December 2022. During the nine months ended September 30, 2022, the Company reclassified $288.1 million to property and
equipment in connection with the deployment of miners at the Rockdale Facility.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
During the nine months ended
September 30, 2022, the Company elected not to renew its co-location mining services agreement with Coinmint, which was therefore terminated
automatically by its terms, effective as of July 8, 2022. In connection with the termination of its agreement with Coinmint, the Company
arranged for the transfer of the miners it was operating at Coinmint’s Massena, New York facility (the “Coinmint Facility”)
to the Company’s Rockdale Facility. The Company also entered into an equipment exchange agreement (the “Swap Agreement”)
with a third-party Bitcoin mining company (the “Counterparty”) whereby Riot transferred approximately 5,700 of the Antminer
model S19 Pro miners it had previously deployed at the Coinmint Facility to the Counterparty in exchange for the Counterparty delivering
5,000 factory-new Antminer model S19j Pro miners to Riot at the Rockdale Facility. Pursuant to the Swap Agreement, the miner exchange
occurred in two stages. The first exchange occurred in June 2022, and the second exchange occurred in July 2022. After completing the
transfer of the miners to the Counterparty under the Swap Agreement, the Company relocated the balance of the miners it had deployed at
the Coinmint Facility to the Rockdale Facility. In accordance with ASC 610-20, Sales and transfers of nonfinancial assets, (“ASC
610-20”), during the three and nine months ended September 30, 2022, the Company recognized a gain on exchange of equipment of $7.7
million and $16.3 million, respectively, associated with the miners exchanged in June and July.
During the year ended December 31, 2021, the
Company entered into six additional purchase agreements with Bitmain Technologies Ltd. (“Bitmain”) to acquire 52,500 Antminer
model S19j miners and 30,000 of their latest Antminer model S19XP miners for a combined total purchase price of approximately $535.0 million.
Pursuant to these agreements and as of September 30, 2022, approximately $44.9 million remains payable to Bitmain in installments in advance
of shipment of the miners, subject to future adjustments as provided in the contracts. Shipment is scheduled to occur on a monthly basis
through December 2022.
Included in construction in progress as of
September 30, 2022, are deposit payments of approximately $0.1 million that relate to a Whinstone initiative for providing certain on-site
temporary housing for stakeholders, including partners, analysts, stockholders, etc. The initiative arose as a result of limited accommodations
for visitors in the Rockdale, Texas, area, which is generally a remote area. The transaction as contemplated would involve Whinstone developing
the temporary housing on land to be purchased from by Lyle Theriot (indirectly, through a limited liability company). Mr. Theriot is part
of the management team at Whinstone and is considered a related party of Whinstone. The Company is evaluating certain related party implications
of the initiative on an ongoing basis, under U.S. GAAP and other applicable regulatory reporting requirements including, but not limited
to, the Sarbanes-Oxley Act of 2002.
Depreciation
and amortization expense related to property and equipment totaled approximately $26.2 million and $7.3 million for the three months
ended September 30, 2022 and 2021, respectively, and approximately $60.3 million and $15.0 million for the nine months ended September
30, 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 Condensed Consolidated Financial Statements
(Unaudited)
Commitment:
As of September 30, 2022, the
Company had outstanding executed purchase agreements for the purchase of miners from Bitmain for a total of approximately 12,097 new model
S19j Pro miners and 19,947 new model S19XP miners. Miners are scheduled to be shipped through December 2022. Pursuant to these agreements,
approximately $44.9 million remains payable to Bitmain, subject to future adjustments as provided in the contracts. 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 (1) | |
| Original
Purchase Commitment | | |
| Open
Purchase Commitment | | |
| Deposit
Balance | | |
Expected
Shipping |
April 5, 2021 | |
$ | 138,506 | | |
$ | 10,395 | | |
$ | 53,070 | | |
Fourth Quarter 2022 |
October 29, 2021 | |
| 56,250 | | |
| (422 | ) | |
| 1,609 | | |
Fourth Quarter 2022 |
November 22, 2021 | |
| 32,550 | | |
| 2,969 | | |
| 21,938 | | |
Fourth Quarter 2022 |
December 10, 2021 | |
| 97,650 | | |
| 11,865 | | |
| 65,814 | | |
Fourth Quarter 2022 |
December 24, 2021 | |
| 202,860 | | |
| 20,118 | | |
| 134,904 | | |
Fourth Quarter 2022 |
Total | |
$ | 527,816 | | |
$ | 44,925 | | |
$ | 277,335 | | |
|
(1) Pursuant to the Company’s agreements with Bitmain, among other provisions, the Company is responsible for all shipping charges incurred in connection with the delivery of the miners.
Note 9. Intangible Assets and Goodwill
Intangible Assets, net:
Intangible assets consisted of the following as of September 30,
2022 and December 31, 2021:
| |
Gross book value | | |
Accumulated amortization | | |
Net book value | | |
Weighted-average life (years) | |
Customer contracts | |
$ | 6,300 | | |
$ | (417 | ) | |
$ | 5,883 | | |
| 10 | |
Trademark | |
| 5,000 | | |
| (517 | ) | |
| 4,483 | | |
| 10 | |
UL Listings | |
| 2,700 | | |
| (188 | ) | |
| 2,512 | | |
| 12 | |
Patents | |
| 561 | | |
| (422 | ) | |
| 139 | | |
| Various | |
Intangible assets, net as of September 30, 2022 | |
$ | 14,561 | | |
$ | (1,544 | ) | |
$ | 13,017 | | |
| | |
| |
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 amortized over their respective
original useful lives. The Company recorded amortization expense of $0.4 million and $4.9 million for the three months ended September
30, 2022 and 2021, respectively, and $1.1 million and $5.8 million for the nine months ended September 30, 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 three months ending December 31, 2022 | |
$ | 694 | |
For the year ending December 31, 2023 | |
| 1,386 | |
For the year ending December 31, 2024 | |
| 1,377 | |
For the year ending December 31, 2025 | |
| 1,376 | |
For the year ending December 31, 2026 | |
| 1,374 | |
For the year ending December 31, 2027 | |
| 1,362 | |
For the year ending December 31, 2028 and thereafter | |
| 5,448 | |
Total | |
$ | 13,017 | |
Goodwill:
The following table represents the changes in goodwill for
the nine months ended September 30, 2022:
Balance at January 1, 2022 | |
$ | 335,563 | |
Impairment | |
| (335,648 | ) |
ESS Metron purchase accounting adjustment | |
| 85 | |
Balance at September 30, 2022 | |
$ | — | |
During the second quarter of 2022, adverse
changes in business climate, including decreases in the price of Bitcoin and increased volatility of equity markets, as evidenced by declines
in the market price of the Company’s securities, those of its peers, and major market indices, have reduced market multiples and
increased weighted-average costs of capital, primarily driven by an increase in interest rates. Market concerns related to inflation,
supply chain disruption issues and other macroeconomic factors have been some of the primary causes for these declines. Additionally,
the price of Bitcoin has declined significantly, notably during the second quarter of 2022. Due primarily to these factors, the Company
determined that a triggering event had occurred, and therefore, performed an interim goodwill impairment assessment
as of June 30, 2022. The valuation of our reporting units was determined with the assistance of an independent valuation specialist firm
using a market approach. The market approach was based on the Guideline Public Company Method, which is derived from metrics of publicly
traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the
markets in which the reporting units operate, giving consideration to risk profiles, size, geography, and diversity of products and services.
Under the market approach, the Company evaluated the fair value based on trailing and forward-looking earnings and revenue multiples derived
from comparable publicly traded companies with similar market position and size as the Company’s reporting units. The unobservable
inputs used to measure the fair value included projected revenue growth rates, the price of Bitcoin, the global Bitcoin network hash rate,
the timing of miner shipments under currently executed contracts and their subsequent deployment, and the determination of appropriate
market comparison companies. The trailing-twelve-month and next-twelve-month enterprise value-to-revenue multiples assumed in the analysis
ranged from approximately 0.7x to approximately 3.9x. The resulting estimated fair values of the combined reporting units were reconciled
to the Company’s market capitalization, including an estimated implied control premium of approximately 30%.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The results of the quantitative test indicated
the fair value of the reporting units did not exceed their carrying amounts, including goodwill. The difference between the carrying amount
and the fair value of $335.6 million was recognized as a non-cash impairment charge during the nine months ended September 30, 2022.
Note 10. Long-Term Assets
Deposits:
Deposits consisted of the following as of September 30, 2022:
Deposits on equipment | |
| |
Beginning balance at January 1, 2022 | |
$ | 261,215 | |
Additions | |
| 194,923 | |
Reclassification to equipment | |
| (288,064 | ) |
Ending balance | |
| 168,074 | |
Security and other deposits | |
| 10,428 | |
Deposits at September 30, 2022 | |
$ | 178,502 | |
Deposits on Equipment:
During the nine months ended September 30,
2022, the Company paid approximately $194.9 million as deposits, primarily for miners, and, as of September 30, 2022, reclassified $288.1
million to property and equipment in connection with the deployment of miners at the Rockdale 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.
Note 11. Accrued Expenses
As of September 30, 2022 and December 31, 2021,
the Company’s accrued expenses consisted of the following:
| |
September 30, 2022 | | |
December 31, 2021 | |
Construction in progress | |
$ | 9,979 | | |
$ | 12,110 | |
Power related costs and remittances | |
| 20,530 | | |
| — | |
Insurance | |
| — | | |
| 2,507 | |
Other | |
| 3,216 | | |
| 1,527 | |
Total accrued expenses | |
$ | 33,725 | | |
$ | 16,144 | |
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 12. Leases
At September 30, 2022, the Company had operating
leases for its offices, manufacturing facilities of ESS Metron, and a ground lease at the Rockdale 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 September 30, 2022 and December 31, 2021,
the right of use assets were $21.8 million and $13.2 million, respectively, and the operating lease liabilities were $22.2 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.
During the nine months ended September 30,
2022, the Company executed a third lease amendment to the ground lease for the Rockdale facility, to add a second 100-acre tract of real
property contiguous to the existing 100-acre tract on which the existing Rockdale 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, followed by three ten-year renewal periods, unless
terminated earlier. Concurrent with this third amendment, the Company executed a first amendment to the water reservation agreement to
obtain additional non-potable cooling 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 approximately twelve years from the original commencement date in April 2021, and is now scheduled to expire
on January 31, 2032, followed by three ten-year renewal periods, unless terminated earlier.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The components of lease expense for the three
and nine months ended September 30, 2022 (in thousands):
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Operating lease cost | |
$ | 844 | | |
$ | 321 | | |
$ | 2,268 | | |
$ | 430 | |
Variable lease cost(1) | |
| 45 | | |
| 11 | | |
| 121 | | |
| 19 | |
Operating lease expense | |
| 889 | | |
| 332 | | |
| 2,389 | | |
| 449 | |
Short-term lease rent expense | |
| — | | |
| 15 | | |
| — | | |
| 15 | |
Total rent expense | |
$ | 889 | | |
$ | 347 | | |
$ | 2,389 | | |
$ | 464 | |
(1) | Amounts primarily include common area maintenance and utility charges not included in the measurement of right of use assets and operating lease liabilities. |
The following table presents other amounts related
to our leases:
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Operating cash flows from operating leases | |
$ | 249 | | |
$ | 322 | | |
$ | 2,471 | | |
$ | 463 | |
Right of use assets exchanged for new operating lease liabilities | |
$ | 1,088 | | |
$ | — | | |
$ | 10,377 | | |
$ | 8,387 | |
Weighted-average remaining lease term – operating leases | |
| 8.9 | | |
| 7.0 | | |
| 8.9 | | |
| 7.0 | |
Weighted-average discount rate – operating leases | |
| 6.6 | % | |
| 7.5 | % | |
| 6.6 | % | |
| 7.5 | % |
The following table presents our future minimum
operating lease payments as of, and subsequent to, September 30, 2022 under ASC 842 (in thousands):
| | |
Ground lease | | |
Office and other leases | | |
Total | |
Three months ending December 31, 2022 | | |
$ | — | | |
$ | 275 | | |
$ | 275 | |
2023 | | |
| 1,940 | | |
| 1,234 | | |
| 3,174 | |
2024 | | |
| 1,998 | | |
| 1,263 | | |
| 3,261 | |
2025 | | |
| 2,058 | | |
| 1,181 | | |
| 3,239 | |
2026 | | |
| 2,119 | | |
| 1,107 | | |
| 3,226 | |
2027 | | |
| 2,183 | | |
| 1,134 | | |
| 3,317 | |
Thereafter | | |
| 9,618 | | |
| 3,222 | | |
| 12,840 | |
Total undiscounted lease payments | | |
| 19,916 | | |
| 9,416 | | |
| 29,332 | |
Less present value discount | | |
| (5,514 | ) | |
| (1,609 | ) | |
| (7,123 | ) |
Present value of lease liabilities | | |
$ | 14,402 | | |
$ | 7,807 | | |
$ | 22,209 | |
We recognize ground lease expense in cost of revenues
– Data Center Hosting, and office and other lease expense in selling, general and administrative expenses, respectively, in the
accompanying unaudited condensed consolidated statements of operations.
Note 13. Stockholders’ Equity
Preferred stock:
During the nine months ended September 30, 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.
At-the-Market Equity Offering:
During the nine months ended September 30, 2022, in
connection with the At-the-Market Sales Agreement between the Company and its Sales Agents, the Company received gross proceeds of approximately
$304.9 million ($298.4 million net of $6.5 million in expenses) from the sale of 37,052,612 shares of common stock, at a weighted average
price of $8.23 per share.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Common Stock:
During the nine months ended September 30, 2022, 1,648,861
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 from time to time (the “2019 Equity Plan”). The Company withheld 642,897 of these shares at a fair value of approximately
$9.9 million, to cover taxes related to the settlement of these vested restricted stock units, as permitted by the 2019 Equity Plan. See
Note 14. “Restricted Common Stock, Stock Options, Restricted Stock Units and Warrants” to these unaudited Notes to Condensed
Consolidated Financial Statements.
Note 14. Restricted Common Stock, Stock Options, Restricted Stock
Units and Warrants
Stock-Based Compensation:
The Company provides stock-based compensation to directors,
employees and consultants under the 2019 Equity Plan, which was approved by stockholders on October 23, 2019 at the 2019 Annual Meeting
of Stockholders. On November 12, 2020 at the 2020 Annual Meeting of Stockholders, the stockholders approved the First Amendment to the
2019 Equity Plan, which raised the total number of shares of the Company’s common stock by 3,500,000 shares. On October 19, 2021,
at the 2021 Annual Meeting of Stockholders, the Company’s stockholders approved the Second Amendment to its 2019 Equity Plan, which
increased the number of shares of the Company’s common stock reserved for issuance by 4,400,000 shares. On July 27, 2022, at the
2022 Annual Meeting of Stockholders, the Company’s stockholders approved the Third Amendment to its 2019 Equity Plan, which increased
the number of shares of the Company’s common stock reserved for issuance by 10,000,000 shares.
The Company’s stock-based compensation expenses
recognized during the three and nine months ended September 30, 2022 and 2021 were included in selling, general and administrative expenses
in the accompanying unaudited condensed consolidated statements of operations.
The Company recognized stock-based compensation
expense during the three and nine months ended September 30, 2022 and 2021 as follows:
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
| 2022 | | |
| 2021 | | |
| 2022 | | |
| 2021 | |
Service-based restricted stock awards | |
$ | 1,918 | | |
$ | 1,518 | | |
$ | 5,856 | | |
$ | 3,423 | |
Performance-based restricted stock awards | |
| 1,643 | | |
| 34,505 | | |
| 1,448 | | |
| 34,505 | |
Total stock-based compensation | |
$ | 3,561 | | |
$ | 36,023 | | |
$ | 7,304 | | |
$ | 37,928 | |
Restricted Common Stock:
During the three months ended September
30, 2022, the Company granted 754,536 restricted stock units (RSUs) under the 2019 Equity Plan, including: (a) 48,337 service-based
RSUs with a fair value of approximately $0.3 million, which are generally eligible to vest in four quarterly tranches following
the grant date, subject to the recipient’s continued employment with the Company through the vesting date; and (b) 696,999 performance-based
RSUs with a fair value of approximately $3.4 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.
During the three months ended September 30,
2022, 486,781 shares of common stock were issued to the Company’s officers and employees in settlement of an equal number
of fully vested RSUs awarded to such individuals by the Company pursuant to grants made under the 2019 Equity Plan. The Company withheld 156,502 of
these shares at a fair value of approximately $1.1 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.
During the three months ended September 30,
2022, the Company’s board of directors approved the exchange of all outstanding unvested performance and service-based RSUs for
performance and service-based restricted stock awards (RSAs) on a one-for-one basis. All material terms of the award agreements remain
the same, including the timing of all vesting periods and the vesting benchmarks. During the quarter ended September 30, 2022, approximately
2.1 million unvested RSUs were exchanged for RSAs (see tables below for details).
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Performance-based RSUs
A summary of the Company’s unvested performance-based
RSUs for the nine months ended September 30, 2022 is presented here:
| |
Number of Shares | | |
Weighted Average Grant-Date Fair Value | |
Unvested at January 1, 2022 | |
| 3,404,585 | | |
$ | 36.68 | |
Granted | |
| 1,412,299 | | |
$ | 10.70 | |
Vested | |
| (729,209 | ) | |
$ | 35.21 | |
Forfeited | |
| (398,871 | ) | |
$ | 35.32 | |
Converted to RSAs | |
| (1,979,002 | ) | |
$ | 32.27 | |
Unvested at September 30, 2022 | |
| 1,709,802 | | |
$ | 27.15 | |
During the nine months ended September 30,
2022, the Company awarded 1,412,299 performance-based RSUs with a fair value of $15.1 million 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 the performance period ending on December 31, 2023.
The value of performance-based RSU’s
is measured based on their fair value on the date of grant and amortized over their respective estimated implicit service periods.
During the nine months ended September 30, 2022,
1,979,002 of the outstanding and unvested performance-based RSUs were converted into an equivalent number of performance-based RSAs with
substantially the same terms as the performance-based RSU agreements they replaced.
Performance-based RSAs
A summary of the Company’s unvested performance-based
RSAs for the nine months ended September 30, 2022 is presented here:
| |
Number of Shares | | |
Weighted Average Grant-Date Fair Value | |
Unvested at January 1, 2022 | |
| — | | |
$ | — | |
Granted | |
| 85,998 | | |
$ | 6.83 | |
Converted from RSUs | |
| 1,979,002 | | |
$ | 32.27 | |
Unvested at September 30, 2022 | |
| 2,065,000 | | |
$ | 31.21 | |
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
During the nine months ended September 30,
2022, the Company awarded 85,998 performance-based RSAs 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 the performance period ending on
December 31, 2023.
The value of performance-based RSAs is measured
based on their fair value on the date of grant and amortized over their respective estimated implicit service periods.
As of September 30, 2022, there was approximately
$17.9 million of total unrecognized compensation cost related to performance-based RSUs and RSAs, which is expected to be recognized over
a remaining weighted-average vesting period of approximately six months.
Service-based RSUs
A summary of the Company’s unvested service-based
RSUs for the nine months ended September 30, 2022 is presented here:
| |
Number of Shares | | |
Weighted Average Grant-Date Fair Value | |
Unvested at January 1, 2022 | |
| 610,561 | | |
$ | 5.93 | |
Vested | |
| (788,636 | ) | |
$ | 7.48 | |
Granted | |
| 912,142 | | |
$ | 9.08 | |
Forfeited | |
| (20,705 | ) | |
$ | 9.11 | |
Converted to RSAs | |
| (136,463 | ) | |
$ | 14.50 | |
Unvested at September 30, 2022 | |
| 576,899 | | |
$ | 8.17 | |
The value of service-based RSUs is measured
based on their fair value on the date of grant and amortized over their respective vesting periods. During the nine months ended
September 30, 2022, the fair value of RSUs granted totaled $8.3 million.
During the nine months ended September 30, 2022,
136,463 unvested service-based RSUs were converted into an equivalent number of service-based RSAs with substantially the same terms as the performance-based RSU agreements they replaced.
Service-based RSAs
A summary of the Company’s unvested service-based
RSAs for the nine months ended September 30, 2022 is presented here:
| |
Number of Shares | | |
Weighted Average Grant-Date Fair Value | |
Unvested at January 1, 2022 | |
| — | | |
$ | — | |
Vested | |
| (9,375 | ) | |
$ | 20.09 | |
Granted | |
| 10,286,202 | | |
$ | 6.73 | |
Converted from RSUs | |
| 136,463 | | |
$ | 14.50 | |
Unvested at September 30, 2022 | |
| 10,413,290 | | |
$ | 6.84 | |
The value of service-based RSAs is measured
based on their fair value on the date of grant and amortized over their respective vesting periods. During the nine months ended
September 30, 2022, the fair value of awards granted totaled $69.3 million.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
As of September 30, 2022, there was approximately
$81.7 million of total unrecognized compensation cost related to unvested service-based RSUs and RSAs, which is expected to be recognized
over a remaining weighted-average vesting period of approximately 1.2 years.
Other Common Stock Purchase Warrants:
As of September 30, 2022, XMS Capital Partners,
LLC (“XMS”) held a warrant to purchase up to 63,000 shares of the Company’s common stock at a purchase price of $48.37
per share, issued as partial payment for advisory services provided 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 nine months ended September 30, 2022.
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 September 30, 2022, and December 31, 2021:
| |
Fair value measured at September 30, 2022 | |
| |
Total carrying value at September 30, 2022 | | |
Quoted prices in active markets (Level 1) | | |
Significant other observable inputs (Level 2) | | |
Significant unobservable inputs (Level 3) | |
Derivative asset | |
$ | 112,944 | | |
$ | — | | |
$ | — | | |
$ | 112,944 | |
Contingent consideration liability | |
$ | 39,996 | | |
$ | — | | |
$ | — | | |
$ | 39,996 | |
| |
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 Rockdale 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 derivative was not designated as a hedging instrument. Prior to the Whinstone Acquisition, the Company did not have any contracts classified as derivative instruments. 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.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The terms of the Power Supply Agreement require
margin-based collateral for both TXU and the Company, 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 of the Company was zero as of September 30, 2022
and December 31, 2021.
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 the 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 nine months ended September
30, 2022 and 2021:
| |
2022 | | |
2021 | |
Balance as of January 1 | |
$ | 26,079 | | |
$ | — | |
Acquisition of Whinstone | |
| — | | |
| 13,967 | |
Change in fair value | |
| 86,865 | | |
| 23,806 | |
Balance as of September 30 | |
$ | 112,944 | | |
$ | 37,773 | |
For the three and nine months ended September
30, 2022, there were changes of approximately ($17.7) million and $86.9 million, respectively, in Level 3 assets measured at fair value.
For the three and nine months ended September 30, 2021, there were changes of approximately $7.4 million and $23.8 million, respectively.
Additionally, during the three and nine months ended September 30, 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 $13.1
million and $21.3 million, respectively, which are recorded in power curtailment credits in the accompanying unaudited condensed consolidated
statements of operations. During the three and nine months ended September 30, 2021, power curtailment credits totaled $2.5 million and
$3.7 million, respectively.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 nine
months ended September 30, 2022 and 2021:
| |
2022 | | |
2021 | |
Balance as of January 1 | |
$ | 83,928 | | |
$ | — | |
Acquisition of Whinstone | |
| — | | |
| 82,953 | |
Change in contingent consideration | |
| (44,108 | ) | |
| — | |
Change in fair value | |
| 176 | | |
| 444 | |
Balance as of September 30 | |
$ | 39,996 | | |
$ | 83,397 | |
For the three and nine months ended September
30, 2022, the change in Level 3 liabilities measured at fair value was zero and $0.2 million, respectively. For the three and nine months
ended September 30, 2021, the change in Level 3 liabilities measured at fair value was $0.3 million and $0.4 million, respectively. 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. 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 any of Level 1,
Level 2 or Level 3 during the periods presented.
Assets and Liabilities Not Measured
at Fair Value on a Recurring Basis:
In addition to assets
and liabilities that are measured at fair value on a recurring basis, we also measure certain assets and liabilities at fair value on
a nonrecurring basis. Our non-financial assets, including intangible assets, operating lease right of use assets, and property, plant
and equipment, are measured at fair value when there is an indication of impairment and the carrying amount exceeds the asset’s
projected undiscounted cash flows. These assets are recorded at fair value only when an impairment charge is recognized.
At September 30, 2022,
the fair values of cash and cash equivalents, accounts receivable, costs and estimated earnings in excess of billings, prepaid expenses
and other current assets, accounts payable, billings in excess of costs and estimated earnings, accrued compensation and accrued expenses
approximated their carrying values because of the short term nature of these instruments.
Bitcoin 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, which is measured using the quoted price of Bitcoin
at the time its fair value is being measured. In testing for impairment, the Company has the option to first perform a qualitative assessment
to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that
an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a
quantitative impairment test. 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. The carrying value of our Bitcoin assets at September 30, 2022 of $125.2 million reflects
the $132.1 million of impairment charges we recorded against the carrying value of our Bitcoin assets during the nine months ended September
30, 2022 due to decreases in the fair value of our Bitcoin assets after receipt.
Applying the market price of one Bitcoin on September
30, 2022 of approximately $19,432 to the Company’s 6,766 Bitcoin held results in an estimated fair value of the Company’s
Bitcoin of $131.5 million as of September 30, 2022. Applying the market price of one Bitcoin on December 31, 2021 of approximately $46,306
to the Company’s 4,884 Bitcoin held as of December 31, 2021, resulted in an estimated fair value of $226.2 million. The fair value of Bitcoin is based on Level 1 inputs.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 16. Commitments and Contingencies
Commitments:
Operating Leases:
The Company leases its primary office locations,
manufacturing facilities and data center 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 non-potable cooling water from a nearby lake to be used by the Company for evaporative cooling at our Rockdale Facility. During the nine months ended September 30, 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 non-potable cooling 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, followed by three ten-year renewal periods, unless terminated earlier, 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 non-potable cooling water
amount, and the charges were increased by a standalone price commensurate with the additional non-potable cooling 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.
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 any such proceedings; however, it assesses the probability
of an unfavorable outcome of any material litigation, claims or proceedings to determine whether a liability had been incurred. 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 to protect the Company from such claims. In terms of any matters where no insurance
coverage is 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. Based on current information, the Company does not believe
there is a reasonable possibility that, other than with regard to the Class Action described below, a material loss, if any, will result
from claims, lawsuits or proceedings to which the Company is subject to either individually, or in the aggregate.
Northern Data Working Capital Dispute
Riot Blockchain, Inc. v.
Northern Data AG. On September 7, 2022, the Company filed a complaint against Northern Data AG, a company organized under the laws
of Germany (“Northern Data”) in the Court of Chancery of the State of Delaware for, among other things, breach of contract.
The complaint alleges Northern Data breached the terms of the Stock Purchase Agreement (the “SPA”), entered into, as of April
8, 2021, with Riot for the purchase of Whinstone by, among other things, refusing to engage in a contractually prescribed process to resolve
disputes over the acquisition price of Whinstone. Riot believes it is owed over $100 million for liabilities that Northern Data failed
to disclose to Riot in its pre-closing calculations. Riot has attempted to resolve the dispute, and, as a result of Northern Data’s
refusal to engage in the dispute resolution process, seeks an order affirmatively declaring that Riot may terminate discussions and that
unresolved matters, including the dispute regarding the over $100 million in liabilities Northern Data failed to disclose, must be submitted
to an independent accounting firm for final resolution.
On September 27, 2022, Northern
Data filed its Answer, Affirmative Defenses, and Verified Counterclaims and Third-Party Claims, which claim that Riot and Whinstone breached
the SPA by allegedly failing to timely remit to Northern Data certain energy credit payments and that Riot is improperly seeking to introduce
indemnification claims into the contractual process to resolve the parties’ dispute over purchase price. Northern Data alleges that
there are approximately $40 million in energy credits that remain unpaid. Northern Data seeks damages in an unspecified amount, a declaration
that Riot may not withhold payments for energy credits pending the resolution of the purchase price dispute, and specific performance
that Riot may not introduce indemnification claims in connection with the process to resolve the purchase price dispute.
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Whinstone Customer Dispute
On June
13, 2022, GMO Gamecenter USA, Inc., a California corporation, and GMO Internet, Inc., a corporation organized and existing under
the laws of Tokyo, Japan (collectively “GMO”), filed a complaint against Whinstone US, Inc. in the Supreme Court of the State
of New York, County of New York: Commercial Division, Index No.: 656762/2022, subsequently removed to the United States District Court,
S.D.N.Y., Case No. 1:22-cv-05974-JPC (the “Complaint”). After extensive discussions and upon Whinstone demanding that GMO
reasonably negotiate a new hosting agreement in good faith pursuant to the terms of its existing agreement, GMO filed the Complaint.
GMO alleges Whinstone breached the terms of the Colocation Services Agreement between GMO and Whinstone by failing to indemnify GMO for
certain contractual loss of profit and causing certain other damages to GMO in the nature of loss of revenue, lost profits and loss of
savings. GMO is seeking – without substantiation - compensatory damages in excess of $50 million, and pre-judgment and post-judgment
interest. Whinstone’s Answer and Counterclaims were filed on August 22, 2022, and on September 12, 2022, GMO filed its answer and
affirmative defenses to counterclaims raised by Whinstone, which included additional claims against Whinstone, as permitted under the
applicable local rules. Subsequent to the period ended September 30, 2022, on November 1, 2022, Whinstone filed supplementary answers
and counterclaims to GMO’s answer and affirmative defenses. Whinstone denies the substantive allegations of the Complaint and has
asserted counterclaims seeking a declaratory judgment of GMO’s failure to negotiate in good faith in accordance with the terms
of the Colocation Services Agreement, as well as compensatory damages in excess of $25 million, including damages from loss of revenue,
breach of contract, pre- and post-judgment interest, and attorneys’ fees and costs in connection with GMO’s breach of the
Colocation Services Agreement. The Company intends to vigorously defend Whinstone against GMO’s claims, and to vigorously enforce
Whinstone’s claims against GMO.
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 27, 2022, Lead Plaintiff filed the third amended consolidated complaint. Defendants submitted motions to dismiss on
July 18, 2022. Briefing on the motions to dismiss was completed in October 2022. 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 February 7, 2023 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. As this
litigation is still at an 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, Data Center 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.
The Mining segment generates revenue from the
Bitcoin the Company earns through its mining activities. The Data Center 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 Data Center 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 Data Center 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 and nine months ended September 30,
2022 and 2021. However, three customers accounted for nearly all of the Company’s third-party Data Center Hosting revenue.
For the three months ended September 30, 2022,
approximately 98% of the Company’s mining revenue was generated from our Rockdale Facility in Rockdale, Texas, and the remaining
2% was generated from the Coinmint Facility. For the nine months ended September 30, 2022, approximately 71% of the Company’s mining
revenue was generated from our Rockdale Facility in Rockdale, Texas, and the remaining 29% was generated from the Coinmint Facility in
New York. During the nine months ended September 30, 2022, the Company terminated its agreement with Coinmint effective July 8, 2022.
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 and nine months ended September 30, 2022 and 2021, and
reconciles to net income (loss) on the unaudited condensed consolidated statements of operations:
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Reportable segment revenue, net: | |
| | | |
| | | |
| | | |
| | |
Mining | |
$ | 22,070 | | |
$ | 53,590 | | |
$ | 126,166 | | |
$ | 108,213 | |
Data Center Hosting | |
| 23,624 | | |
| 11,193 | | |
| 68,240 | | |
| 14,067 | |
Engineering | |
| 20,300 | | |
| — | | |
| 55,050 | | |
| — | |
Other revenue | |
| 25 | | |
| 25 | | |
| 73 | | |
| 73 | |
Eliminations | |
| (19,729 | ) | |
| — | | |
| (50,505 | ) | |
| — | |
Total segment and consolidated revenue | |
| 46,290 | | |
| 64,808 | | |
| 199,024 | | |
| 122,353 | |
Reportable segment cost of revenues (exclusive of depreciation and amortization shown below): | |
| | | |
| | | |
| | | |
| | |
Mining | |
| 15,949 | | |
| 13,034 | | |
| 60,793 | | |
| 29,893 | |
Data Center Hosting | |
| 28,201 | | |
| 12,581 | | |
| 75,705 | | |
| 16,317 | |
Engineering | |
| 16,767 | | |
| — | | |
| 47,302 | | |
| — | |
Eliminations | |
| (18,237 | ) | |
| — | | |
| (47,138 | ) | |
| — | |
Total segment and consolidated cost of revenues (exclusive of depreciation and amortization shown below) | |
| 42,680 | | |
| 25,615 | | |
| 136,662 | | |
| 46,210 | |
Reconciling Items: | |
| | | |
| | | |
| | | |
| | |
Acquisition-related costs | |
| — | | |
| (552 | ) | |
| (78 | ) | |
| (18,894 | ) |
Selling, general and administrative | |
| (16,004 | ) | |
| (40,307 | ) | |
| (37,549 | ) | |
| (47,971 | ) |
Depreciation and amortization | |
| (26,559 | ) | |
| (12,207 | ) | |
| (61,366 | ) | |
| (20,791 | ) |
Change in fair value of derivative asset | |
| (17,749 | ) | |
| 7,413 | | |
| 86,865 | | |
| 23,806 | |
Power curtailment credits | |
| 13,070 | | |
| 2,507 | | |
| 21,328 | | |
| 3,650 | |
Change in fair value of contingent consideration | |
| — | | |
| (259 | ) | |
| (176 | ) | |
| (444 | ) |
Realized gain on sale/exchange of Bitcoin | |
| 1,854 | | |
| 65 | | |
| 25,443 | | |
| 94 | |
Gain on exchange of equipment | |
| 7,667 | | |
| — | | |
| 16,281 | | |
| — | |
Impairment of Bitcoin | |
| (5,900 | ) | |
| — | | |
| (132,077 | ) | |
| (17,507 | ) |
Impairment of goodwill | |
| — | | |
| — | | |
| (335,648 | ) | |
| — | |
Interest income (expense) | |
| 348 | | |
| 40 | | |
| (9 | ) | |
| 295 | |
Realized loss on sale of marketable equity securities | |
| — | | |
| — | | |
| (1,624 | ) | |
| — | |
Realized gain on sale/exchange of long-term investment | |
| — | | |
| — | | |
| — | | |
| 26,260 | |
Unrealized gain (loss) on marketable equity securities | |
| 142 | | |
| (11,151 | ) | |
| (6,306 | ) | |
| (10,812 | ) |
Other income (expense) | |
| — | | |
| (85 | ) | |
| (59 | ) | |
| 1,425 | |
Current income tax benefit (expense) | |
| (89 | ) | |
| — | | |
| (828 | ) | |
| — | |
Deferred income tax benefit (expense) | |
| 3,041 | | |
| — | | |
| 9,667 | | |
| (3,730 | ) |
Net income (loss) | |
$ | (36,569 | ) | |
$ | (15,343 | ) | |
$ | (353,774 | ) | |
$ | 11,524 | |
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 18. Revisions of Previously Issued
Financial Statements
As noted in Note 4. “Acquisitions”, on
May 26, 2021, the Company acquired 100% of the equity interests of Whinstone. The Whinstone Acquisition
was accounted for using the acquisition method of accounting in accordance with ASC 805, Business Combinations, which requires
recognition of assets acquired and liabilities assumed at their respective fair values on the date of acquisition. During
the third quarter of 2022, the Company discovered a classification error in its reported allocation of acquisition date fair value to
property and equipment, which resulted in an understatement of property and equipment and an equal overstatement of goodwill as of the
balance sheet dates outlined below.
In accordance with Staff Accounting Bulletin (“SAB”)
99, Materiality, and SAB 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements, the Company evaluated the materiality of the error from qualitative and quantitative perspectives, and
concluded that the error was immaterial to any prior annual or interim financial statements. Notwithstanding
this conclusion, management has revised the accompanying condensed consolidated financial statements and related notes included herein
to correct this error for all periods presented.
The following tables present the effect of correcting
this error on the Company’s previously issued financial statements. There were no changes to the statements of stockholders’
equity that have not otherwise been reflected in the balance sheets and statements of operations as detailed in the tables below.
| |
As of June 30, 2021 | |
Condensed Consolidated Balance Sheet | |
As previously reported | | |
Adjustment | | |
As revised | |
Property & equipment, net | |
$ | 128,815 | | |
$ | 13,500 | | |
$ | 142,315 | |
Goodwill | |
| 267,409 | | |
| (13,500 | ) | |
| 253,909 | |
Total assets | |
| 906,369 | | |
| — | | |
| 906,369 | |
| |
| | | |
| | | |
| | |
| |
| As of September 30, 2021 | | |
Condensed Consolidated Balance Sheet | |
| As previously reported | | |
| Adjustment | | |
| As revised | |
Property & equipment, net | |
$ | 200,751 | | |
$ | 13,500 | | |
$ | 214,251 | |
Goodwill | |
| 267,237 | | |
| (13,500 | ) | |
| 253,737 | |
Total assets | |
| 954,407 | | |
| — | | |
| 954,407 | |
| |
| | | |
| | | |
| | |
| |
| As of December 31, 2021 | | |
Consolidated Balance Sheet | |
| As previously reported | | |
| Adjustment | | |
| As revised | |
Property & equipment, net | |
$ | 262,980 | | |
$ | 13,500 | | |
$ | 276,480 | |
Goodwill | |
| 349,063 | | |
| (13,500 | ) | |
| 335,563 | |
Total assets | |
| 1,530,939 | | |
| — | | |
| 1,530,939 | |
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| |
| As of March 31, 2022 | | |
Condensed Consolidated Balance
Sheet | |
| As previously reported | | |
| Adjustment | | |
| As revised | |
Property & equipment, net | |
$ | 325,132 | | |
$ | 13,500 | | |
$ | 338,632 | |
Goodwill | |
| 349,148 | | |
| (13,500 | ) | |
| 335,648 | |
Total assets | |
| 1,549,755 | | |
| — | | |
| 1,549,755 | |
| |
| | | |
| | | |
| | |
| |
| As of June 30, 2022 | | |
Condensed Consolidated Balance Sheet | |
| As previously reported | | |
| Adjustment | | |
| As revised | |
Property & equipment, net | |
$ | 411,244 | | |
$ | 13,500 | | |
$ | 424,744 | |
Goodwill | |
| — | | |
| — | | |
| — | |
Total assets | |
| 1,436,225 | | |
| 13,500 | | |
| 1,449,725 | |
Accumulated deficit | |
| (568,543 | ) | |
| 13,500 | | |
| (555,043 | ) |
Total stockholders’ equity | |
| 1,288,565 | | |
| 13,500 | | |
| 1,302,065 | |
Total liabilities and stockholders’ equity | |
| 1,436,225 | | |
| 13,500 | | |
| 1,449,725 | |
| |
| | | |
| | | |
| | |
| |
| Three Months Ended June 30, 2022 | | |
Condensed Consolidated Statement of
Operations | |
| As previously reported | | |
| Adjustment | | |
| As revised | |
Impairment of goodwill | |
$ | 349,148 | | |
$ | (13,500 | ) | |
$ | 335,648 | |
Total costs and expenses | |
| 438,960 | | |
| (13,500 | ) | |
| 425,460 | |
Operating income (loss) | |
| (366,013 | ) | |
| 13,500 | | |
| (352,513 | ) |
Net income (loss) before taxes | |
| (372,533 | ) | |
| 13,500 | | |
| (359,033 | ) |
Net income (loss) | |
| (366,334 | ) | |
| 13,500 | | |
| (352,834 | ) |
Basic net income (loss) per share | |
| (2.81 | ) | |
| 0.10 | | |
| (2.71 | ) |
Diluted net income (loss) per share | |
| (2.81 | ) | |
| 0.10 | | |
| (2.71 | ) |
| |
| | | |
| | | |
| | |
| |
| Six Months Ended June 30, 2022 | | |
Condensed Consolidated Statement of
Operations | |
| As previously reported | | |
| Adjustment | | |
| As revised | |
Impairment of goodwill | |
$ | 349,148 | | |
$ | (13,500 | ) | |
$ | 335,648 | |
Total costs and expenses | |
| 480,838 | | |
| (13,500 | ) | |
| 467,338 | |
Operating income (loss) | |
| (328,104 | ) | |
| 13,500 | | |
| (314,604 | ) |
Net income (loss) before taxes | |
| (336,592 | ) | |
| 13,500 | | |
| (323,092 | ) |
Net income (loss) | |
| (330,705 | ) | |
| 13,500 | | |
| (317,205 | ) |
Basic net income (loss) per share | |
| (2.67 | ) | |
| 0.11 | | |
| (2.56 | ) |
Diluted net income (loss) per share | |
| (2.67 | ) | |
| 0.11 | | |
| (2.56 | ) |
| |
| | | |
| | | |
| | |
| |
| Six Months Ended June 30, 2022 | | |
Condensed Consolidated Statement of
Cash Flows | |
| As previously reported | | |
| Adjustment | | |
| As revised | |
Net income (loss) | |
$ | (330,705 | ) | |
$ | 13,500 | | |
$ | (317,205 | ) |
Impairment of goodwill | |
| 349,148 | | |
| (13,500 | ) | |
| 335,648 | |
Net cash used in operating activities | |
| (14,393 | ) | |
| — | | |
| (14,393 | ) |
Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be
read in conjunction with our unaudited condensed interim consolidated financial statements and the related notes and other financial information
included elsewhere in this Quarterly Report and with our audited consolidated financial statements for the fiscal year ended December
31, 2021, as included in our 2021 Annual Report. In addition to historical consolidated financial information, the following discussion
includes forward-looking statements about our business, financial condition and results of operations, including discussions about management’s
expectations for our business. These statements represent projections, beliefs and expectations based on current circumstances and conditions
and our actual results could differ materially from those discussed in these forward-looking statements. Further, these forward-looking
statements should not be construed either as assurances of performance or as promises of a given course of action. You should review the
sections of this Quarterly Report entitled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors”
for a discussion of factors that could cause actual results to differ materially – and potentially adversely – from the results
described in or implied by the forward-looking statements contained in the following discussion and analysis and elsewhere in this Quarterly
Report.
Business Overview:
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 Rockdale Facility, with 700 megawatts in total capacity. Our Rockdale 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. Additionally, we are beginning development of a second large-scale Bitcoin mining data center at our Corsicana Facility,
which is expected to have approximately one gigawatt of available capacity for both our Bitcoin mining operations and hosting of institutional-scale
Bitcoin mining and data center clients.
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 among opportunities that generate the highest return on our capital.
Industry Trends
During 2022, we observed a number of companies in
the Bitcoin ecosystem experience significant challenges and failure due to the precipitous decline in the price of Bitcoin. We anticipate
this trend will likely continue as companies attempt to shift their business models to operate on compressed margins. The dramatic increase
in the price of Bitcoin observed in the market during the last few years caused many companies to over-leverage themselves, operating
in an unsustainable way given the recent instability in the price of Bitcoin. Despite challenges in the ecosystem, Riot continues to focus
on building long-term stockholder value by taking strategic action to vertically integrate, expanding the Rockdale Facility and developing
our Corsicana Facility. As we grow our business, we continue to focus on deploying our efficient mining fleet, at scale, while realizing
benefit of being an owner and operator of our Bitcoin mining facilities.
We anticipate that other companies in the industry
will continue to experience challenges, and the end of 2022 and the start of 2023 will continue to be a period of consolidation in the
Bitcoin mining industry, and we believe that, given our relative position, liquidity and absence of long-term debt, in the competitive
landscape, we are likely positioned to benefit from this consolidation. As a result of any strategic action undertaken by us, our business
and financial results may change significantly. We are continuously evaluating strategic opportunities which we may decide to undertake
as part of our strategic growth initiatives; however, we can offer no assurances that any strategic opportunities which we decide to undertake
will be achieved on the schedule or within the budget we anticipate, if at all, in our competitive and evolving industry. See Part I,
Item 1A. “Risk Factors” of our 2021 Annual Report for additional discussion regarding potential impacts our competitive and
evolving industry may have on our business.
Bitcoin Mining
The Company’s current focus is on its mining
operation, and during the nine months ended September 30, 2022, we continued to deploy miners at our Rockdale Facility and continued development
activities at the Corsicana Facility, with the objective of increasing the Company’s operational efficiency and performance.
As of September 30, 2022, our Mining business operated
approximately 55,728 ASIC miners, with a hash rate capacity of approximately 5.6 exahash per second (“EH/s”). During the nine
months ended September 30, 2022, we mined 3,842 Bitcoin, which represented an increase of 36% over the 2,458 Bitcoin we mined during the
nine months ended September 30, 2021. Based on our existing operations and expected deliveries of miners pursuant to our purchase orders
with their manufacturer, Bitmain, we anticipate having approximately 115,450 miners in operation, with a hash rate capacity of approximately
12.5 EH/s by the first quarter of 2023.
During the three months ended September 30, 2022,
we fully exited our Mining operations at the Coinmint Facility. We believe this transition will lower our overall cost of revenues for
the Mining business as new miners will be deployed at the Rockdale Facility. See Note 8. “Property and Equipment” to these
unaudited Notes to Condensed Consolidated Financial Statements.
Our Bitcoin mining operations are subject to unique industry risks such
as the historical volatility in the demand for, and price of, Bitcoin and changes in the public perception of Bitcoin.
Miner Purchases and Deployments
At September 30, 2022, we had purchased, received
and/or deployed the following miners:
| |
Number of miners | |
Miners deployed at January 1, 2022 | |
| 30,907 | |
Net miners deployed during the nine months ended September 30, 2022 | |
| 24,821 | |
Miners received, but not yet deployed | |
| 27,678 | |
Miners under contract, but not yet received | |
| 32,044 | |
Total miners under contract, deployed or expected to be received, at September 30, 2022 | |
| 115,450 | |
As of September 30, 2022, the Company had outstanding
executed purchase agreements for the purchase of miners from Bitmain for a total of approximately 12,097 new model S19j Pro miners and
19,947 new model S19XP miners, scheduled to be shipped through December 2022. Pursuant to these agreements, approximately $44.9 million
remains payable to Bitmain in installments in advance of shipment of the miners, which is scheduled to occur monthly through December
2022, subject to future adjustments as provided in the contracts.
To take advantage of our low-cost power supply
agreement at the Company’s Rockdale Facility and eliminate third-party hosting fees, during the nine months ended September 30,
2022, the Company elected not to renew its co-location mining services agreement with Coinmint, which was, therefore, terminated automatically
by its terms as of July 8, 2022.
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 impact 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.
In addition, nationally, we have experienced
and are experiencing varying degrees of inflation, resulting in part from various supply chain disruptions, increased shipping and transportation
costs, and increased raw material and labor costs, as well as other disruptions resulting from the continuing COVID-19 pandemic and general
global economic conditions. This inflationary impact on our cost structure has contributed to adjustments in operations, ability to obtain
materials and retain talent, despite a continued focus on reducing our costs where possible.
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 Rockdale 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 continue
to monitor developments in the global supply chain and assess their potential impact on our expansion plans.
Summary of Mining Results
The following table presents additional information
about our Mining activities, including Bitcoin production and sales of the Bitcoin the Company mined during the nine months ended September
30, 2022, and 2021 ($ in thousands):
| |
Quantities | | |
| |
| |
(in coins) | | |
Amounts | |
Balance at January 1, 2022 | |
| 4,884 | | |
$ | 159,544 | |
Revenue recognized from Bitcoin mined | |
| 3,842 | | |
| 126,166 | |
Proceeds from sale of Bitcoin | |
| (1,925 | ) | |
| (52,491 | ) |
Exchange of Bitcoin for employee compensation | |
| (35 | ) | |
| (1,434 | ) |
Realized gain on sale/exchange of Bitcoin | |
| — | | |
| 25,443 | |
Impairment of Bitcoin | |
| — | | |
| (132,077 | ) |
Balance at September 30, 2022 | |
| 6,766 | | |
$ | 125,151 | |
| |
Quantities | | |
| |
| |
(in coins) | | |
Amounts | |
Balance at January 1, 2021 | |
| 1,078 | | |
$ | 11,626 | |
Revenue recognized from Bitcoin mined | |
| 2,458 | | |
| 108,213 | |
Proceeds from sale of Bitcoin | |
| — | | |
| — | |
Exchange of Bitcoin for employee compensation | |
| (3 | ) | |
| (113 | ) |
Realized gain on sale/exchange of Bitcoin | |
| — | | |
| 94 | |
Impairment of Bitcoin | |
| — | | |
| (17,507 | ) |
Balance at September 30, 2021 | |
| 3,533 | | |
$ | 102,313 | |
Results of Operations Comparative Results for the Three Months Ended
September 30, 2022 and 2021:
Revenue:
For the three months ended September 30, 2022 and
2021, Mining revenue was $22.1 million, and $53.6 million, respectively. The decrease of $31.5 million was due to a lower number of Bitcoin
mined of 1,042 in the 2022 period, as compared to 1,292 in the 2021 period, combined with lower Bitcoin values in the 2022 period, averaging
$21,184 per coin as compared to $41,837 per coin in the 2021 period. The primary reason for the decrease in the number of Bitcoin mined
was due to the Company’s effective employment of its proprietary power strategy to significantly reduce overall power costs. As
noted below, during the three months ended September 30, 2022, the Company earned $13.1 million in power credits, to be credited against
its power invoices, as a result of temporarily pausing its operations. The power credits equate to approximately 760 Bitcoin, as computed
by using the average daily closing BTC prices on a monthly basis. During the three months ended September 30, 2021, the Company earned
$2.5 million in power credits, or the equivalent of approximately 66 Bitcoin.
For the three months ended September 30, 2022 and
2021, Data Center Hosting revenue was $8.4 million, and $11.2 million, respectively. The decrease of $2.8 million was due primarily to
lower revenue share from customers due to the lower Bitcoin values in the 2022 period combined with lower customer billings due to Whinstone’s
participation in ERCOT’s energy demand response programs. Data Center Hosting revenue includes upfront payments which we record
as deferred revenue and generally recognize as services are provided. We provide energized space and operating and maintenance services
to third-party mining companies who locate their mining hardware at our Rockdale Facility under long-term contracts. We account for these
agreements as a single performance obligation for services being delivered in a series with delivery being measured by daily successful
operation of the mining hardware. As such, we recognize revenue over the life of the contract as its series of performance obligations
are met. The contracts are recognized in the amount for which we have the right to invoice because we elected the “right to invoice”
practical expedient.
For the three months ended September 30, 2022, Engineering
revenue was $15.8 million. There was no Engineering revenue for the three months ended September 30, 2021 as such date was prior to the
acquisition of the Engineering segment. Engineering revenue is derived from the sale of custom products built to customers’ specifications
under fixed-price contracts with one identified performance obligation. Engineering revenues are recognized over time as performance creates
or enhances an asset with no alternative use, and for which the Company has an enforceable right to receive compensation as defined under
the contract.
Costs and expenses:
Cost of revenues for Mining for the three months ended
September 30, 2022 and 2021 was $14.7 million and $13.0 million, respectively, representing an increase of approximately $1.7 million.
As a percentage of Mining revenue, cost of revenues totaled 66.5% and 24.3% for each of the three months ended September 30, 2022 and
2021, respectively. Cost of revenues consists primarily of direct production costs of mining operations, including electricity, labor,
insurance and the variable Coinmint hosting fee, but excluding depreciation and amortization, which are separately stated. The increase
of $1.6 million in cost of revenues was primarily due to the increase in mining capacity at the Rockdale Facility, which requires more
headcount and direct costs necessary to maintain and support the mining operations. As noted below, during the three months ended September
30, 2022 and 2021, the Company earned $13.1 million and $2.5 million, respectively, in power credits to be credited against its power
invoices, as a result of temporarily pausing its operations. These credits are recognized in power curtailment credits in the statements
of operations, outside of cost of revenues, but significantly reduce the Company’s overall cost to mine Bitcoin. When netting the
power curtailment credits with the costs of revenues, the net costs as a percentage of Mining revenue were 38.8% and 24.3% for the three
months ended September 30, 2022 and 2021, respectively.
Cost of revenues for Data Center Hosting for the three
months ended September 30, 2022 and 2021 was $14.2 million and $12.6 million, respectively. The costs consisted primarily of direct power
costs, with the balance primarily incurred for rent and compensation costs.
Cost of revenues for Engineering for the three months
ended September 30, 2022 was $13.8 million. There were no engineering costs for the three months ended September 30, 2021 as such date
was prior to the acquisition of the Engineering segment. The 2022 costs consisted primarily of direct materials and labor, as well as
indirect manufacturing costs. The increase in cost of revenues was primarily due to the increase in headcount to support the Company’s
growth combined with an increase in power costs.
Selling, general and administrative expenses during
the three months ended September 30, 2022 and 2021 totaled $16.0 million and $40.3 million, respectively. Selling, general and administrative
expenses consist of stock-based compensation, legal and professional fees and other personnel and related costs. The decrease of $24.3
million is primarily due to a decrease of $29.7 million in compensation-related expense due to the adoption of the Company’s performance-based
stock plan in August 2021, partially offset by additional employees to support the Company’s growth, an increase in audit and consulting
fees of $1.9 million resulting primarily from assistance on internal control systems and procedures and information technology projects
and an increase in other general operating costs, including rent, to support the Company’s growth.
Depreciation and amortization expenses during the
three months ended September 30, 2022 totaled $26.6 million, an increase of approximately $14.4 million as compared to $12.2 million for
the three months ended September 30, 2021. The increase was primarily due to higher depreciation expense recognized for the Rockdale Facility
and our recently acquired miners.
Change in fair value of our derivative asset for the
three months ended September 30, 2022 and 2021, was ($17.7) million and $7.4 million, respectively, and was recorded to adjust the fair
value of our Power Supply Agreement, which was classified as a derivative asset and measured at fair value.
Power curtailment credits for the three months ended
September 30, 2022 and 2021, was $13.1 million and $2.5 million, respectively, and represents power sales into the ERCOT marketplace through
Whinstone’s participation in ERCOT’s energy demand response programs.
Realized gain on sale/exchange of Bitcoin for the
three months ended September 30, 2022 was $1.9 million. The realized gain or loss on sale/exchange of Bitcoin for the three months ended
September 30, 2021 was nominal.
Gain on exchange of equipment for the three months
ended September 30, 2022 was $7.7 million arising from the equipment exchange agreement with a third-party Bitcoin mining company. There
was no gain on exchange of equipment during the three months ended September 30, 2021.
Impairment of Bitcoin for the three months ended September
30, 2022 was $5.9 million arising from the decline in Bitcoin prices. There was no impairment of Bitcoin recognized during the three months
ended September 30, 2021.
Other income and expenses:
Other income for the three months ended September
30, 2022 was $0.5 million, and primarily consisted of interest and other income of $0.3 million and the unrealized gain on marketable
equity securities of $0.1 million. Other expense for the three months ended September 30, 2021 was $11.2 million, which primarily related
to the unrealized loss recognized due to the decline in the fair value of our marketable equity securities.
Results of Operations Comparative Results for the Nine Months Ended
September 30, 2022 and 2021:
Revenue:
For the nine months ended September 30, 2022 and 2021,
Mining revenue was $126.2 million, and $108.2 million, respectively. The increase of $18.0 million was due to a higher number of Bitcoin
mined of 3,842 in the 2022 period, as compared to 2,458 in the 2021 period, partially offset by lower Bitcoin values in the 2022 period,
averaging $32,839 per coin as compared to $44,591 per coin in the 2021 period. The number of Bitcoin mined during 2022 was significantly
impacted by the Company’s effective employment of its proprietary power strategy to significantly reduce overall power costs. As
noted below, during the nine months ended September 30, 2022, the Company earned $21.3 million in power credits to be credited against
its power invoices, as a result of temporarily pausing its operations. The power credits equate to approximately 1,160 Bitcoin, as computed
by using the average daily closing BTC prices on a monthly basis. During the nine months ended September 30, 2021, the Company earned
$3.7 million in power credits, or the equivalent of approximately 92 Bitcoin.
For the nine months ended September 30, 2022 and 2021,
Data Center Hosting revenue was $27.9 million, and $14.1 million, respectively. The $13.8 million increase was primarily due to the 2021
period only containing four months of Data Center Hosting revenue versus nine for the 2022 period. Data Center Hosting revenue includes
upfront payments which we record as deferred revenue and generally recognize as services are provided. We provide energized space and
operating and maintenance services to third-party mining companies who locate their mining hardware at our Rockdale Facility under long-term
contracts. We account for these agreements as a single performance obligation for services being delivered in a series with delivery being
measured by daily successful operation of the mining hardware. As such, we recognize revenue over the life of the contract as its series
of performance obligations are met. The contracts are recognized in the amount for which we have the right to invoice because we elected
the “right to invoice” practical expedient. The Data Center Hosting segment was acquired in May 2021, and therefore its results
of operations are only included in the Company’s consolidated results of operations for four months during 2021 compared to nine
in 2022.
For the nine months ended September 30, 2022, Engineering
revenue was $44.9 million. There was no Engineering revenue for the nine months ended September 30, 2021 as such date was prior to the
acquisition of the Engineering segment. Engineering revenue is derived from the sale of custom products built to customers’ specifications
under fixed-price contracts with one identified performance obligation. Engineering revenues are recognized over time as performance creates
or enhances an asset with no alternative use, and for which the Company has an enforceable right to receive compensation as defined under
the contract.
Other revenue consisting of license fees was not significant
in either period.
Costs and expenses:
Cost of revenues for Mining for the nine months
ended September 30, 2022 and 2021 was $51.8 million and $29.9 million, respectively, representing an increase of approximately $21.9
million. As a percentage of Mining revenue, cost of revenues totaled 41.0% and 27.6% for each of the nine months ended September 30,
2022 and 2021, respectively. Cost of revenues consists primarily of direct production costs of mining operations, including
electricity, labor, insurance and the variable Coinmint hosting fee, but excluding depreciation and amortization, which are
separately stated. The increase of $21.9 million in cost of revenues is primarily due to the increase in mining capacity at the
Rockdale Facility, which requires more headcount and direct costs necessary to maintain and support the mining operations. As noted
below, during the nine months ended September 30, 2022 and 2021, the Company earned $21.3 million and $3.7 million, respectively, in
power credits, to be credited against its power invoices, as a result of temporarily pausing its operations. These credits are
recognized in power curtailment credits in the statements of operations, outside of cost of revenues, but significantly reduce the
Company’s overall cost to mine Bitcoin. When netting the power curtailment credits with the costs of revenues, the net costs
as a percentage of Mining revenue were 34.6% and 27.6% for the nine months ended September 30, 2022 and 2021, respectively.
Cost of revenues for Data Center Hosting for
the nine months ended September 30, 2022 and 2021 was $44.4 million and $16.3 million, respectively. The costs consisted primarily of
direct power costs, with the balance primarily incurred for rent and compensation costs. Whinstone was acquired in May 2021, and therefore
its results of operations are only included in the Company’s consolidated results of operations for four months during 2021 compared
to nine in 2022.
Cost of revenues for Engineering for the nine months
ended September 30, 2022 was $40.5 million. There were no Engineering costs for the nine months ended September 30, 2021 as such date
was prior to the acquisition of the Engineering segment. The 2022 costs consisted primarily of direct materials and labor, as well as
indirect manufacturing costs.
Acquisition-costs for the nine months ended September
30, 2022 were nominal. Acquisition-related costs for the nine months ended September 30, 2021, totaled $18.9 million, and consisted of
expenses incurred in connection with our acquisition of Whinstone.
Selling, general and administrative expenses during
the nine months ended September 30, 2022 and 2021 totaled $37.5 million and $48.0 million, respectively. Selling, general and administrative
expenses consist of stock-based compensation, legal and professional fees and other personnel and related costs. The decrease of $10.5
million is primarily due to a decrease of $24.8 million in compensation-related expense due to the adoption of the performance-based stock
plan in August 2021, partially offset by additional employees to support the Company’s growth, an increase in audit and consulting
fees of $3.8 million resulting primarily from assistance on internal control systems and procedures and information technology projects,
an increase in insurance expense of $1.2 million, and an increase in other general operating costs, including rent, to support the Company’s
growth.
Depreciation and amortization expenses during
the nine months ended September 30, 2022 totaled $61.4 million, an increase of approximately $40.6 million as compared to $20.8
million for the nine months ended September 30, 2021. The increase was primarily due to higher depreciation expense recognized for
the Rockdale Facility and our recently acquired miners.
Change in fair value of our derivative asset for the
nine months ended September 30, 2022 and 2021 was $86.9 million and $23.8 million, respectively, and was recorded to adjust the fair value
of our Power Supply Agreement, which is classified as a derivative asset and measured at fair value.
Power curtailment credits for the nine months ended
September 30, 2022 and 2021 was $21.3 million and $3.7 million, respectively, and represents power sales into the ERCOT marketplace through
Whinstone’s participation in ERCOT’s energy demand response programs.
Realized gain on sale/exchange of Bitcoin for the
nine months ended September 30, 2022 and 2021 was $25.4 million and $0.1 million, respectively.
Gain on exchange of equipment for the nine months
ended September 30, 2022 was $16.3 million arising from the equipment exchange agreement with a third-party Bitcoin mining company. There
was no gain on exchange of equipment during the nine months ended September 30, 2021.
Impairment of Bitcoin for the nine months ended September
30, 2022 and 2021 was $132.1 million and $17.5 million, respectively, arising from the decline in Bitcoin prices.
Impairment of goodwill for the nine months ended September
30, 2022 was $335.6 million arising from recent adverse changes in business climate, including decreases in the price of Bitcoin and increased
volatility of equity markets, as evidenced by declines in the market price of the Company’s securities, those of its peers, and
major market indices. There was no impairment recognized during the nine months ended September 30, 2021.
Other income and expenses:
Other expense for the nine months ended September
30, 2022 was $8.0 million and primarily consisted of the unrealized loss on marketable equity securities of $6.3 million and the realized
loss on sale of marketable equity securities of $1.6 million recognized in connection with the sale of a portion of our shares of Mogo.
Other income for the nine months ended September 30, 2021 was $17.2 million, which primarily related to a $26.3 million realized gain
on sale/exchange of long-term investment recognized in connection with the exchange of our shares of Coinsquare Ltd.
(“Coinsquare”) for shares of Mogo, partially offset by $10.8 million of unrealized loss recognized on our investment
in Mogo.
Non-GAAP Measures
In addition to consolidated U.S. GAAP financial measures,
we consistently evaluate our use of and calculation of the non-GAAP financial measures, “Adjusted EBITDA” and Adjusted earnings
per share (“Adjusted EPS”). Adjusted EBITDA is a financial measure defined as our EBITDA, adjusted to eliminate the effects
of certain non-cash and / or non-recurring items, that do not reflect our ongoing strategic business operations. EBITDA is computed as
net income before interest, taxes, depreciation, and amortization. Adjusted EBITDA is EBITDA further adjusted for certain income and expenses,
which management believes results in a performance measurement that represents a key indicator of the Company’s core business operations
of Bitcoin mining. The adjustments include fair value adjustments such as derivative power contract adjustments, equity securities value
changes, and non-cash stock-based compensation expense, in addition to financing and legacy business income and expense items. The Company
determined to exclude impairments and gains or losses on sales or exchanges of Bitcoin from our calculation of Adjusted Non-GAAP EBITDA
for all periods presented.
Adjusted EPS is a financial measure defined as our
EBITDA divided by our diluted weighted-average shares outstanding, adjusted to eliminate the effects of certain non-cash and / or non-recurring
items, that do not reflect our ongoing strategic business operations. EBITDA is computed as net income before interest, taxes, depreciation,
and amortization. Adjusted EPS is EBITDA further adjusted for certain income and expenses, which management believes results in a performance
measurement that represents a key indicator of the Company’s core business operations of Bitcoin mining. The adjustments include
fair value adjustments such as derivative power contract adjustments, equity securities value changes, and non-cash stock-based compensation
expense, in addition to financing and legacy business income and expense items. The Company determined to exclude impairments and gains
or losses on sales or exchanges of Bitcoin from our calculation of Adjusted Non-GAAP EPS for all periods presented.
We believe Adjusted EBITDA and Adjusted EPS can be
important financial measures because they allow management, investors, and our board of directors to evaluate and compare our operating
results, including our return on capital and operating efficiencies, from period-to-period by making such adjustments.
Adjusted EBITDA and Adjusted EPS are provided in addition
to and should not be considered to be a substitute for, or superior to net income, the comparable measure under U.S. GAAP. Further, Adjusted
EBITDA and Adjusted EPS should not be considered as an alternative to revenue growth, net income, diluted earnings per share or any other
performance measure derived in accordance with U.S. GAAP, or as an alternative to cash flow from operating activities as a measure of
our liquidity. Adjusted EBITDA and Adjusted EPS have limitations as analytical tools, and you should not consider such measures either
in isolation or as substitutes for analyzing our results as reported under U.S. GAAP.
Reconciliations of Adjusted EBITDA and Adjusted EPS to the most comparable
U.S. GAAP financial metric for historical periods are presented in the table below:
Reconciliation of GAAP and Non-GAAP Financial Information
Non-GAAP Adjusted EBITDA | |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
(in thousands) | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
| | |
| | |
| | |
| |
Net income (loss) | |
$ | (36,569 | ) | |
$ | (15,343 | ) | |
$ | (353,774 | ) | |
$ | 11,524 | |
Interest (income) expense | |
| (348 | ) | |
| (40 | ) | |
| 9 | | |
| (295 | ) |
Income tax expense (benefit) | |
| (2,952 | ) | |
| — | | |
| (8,839 | ) | |
| 3,730 | |
Depreciation and amortization | |
| 26,559 | | |
| 12,207 | | |
| 61,366 | | |
| 20,791 | |
EBITDA | |
| (13,310 | ) | |
| (3,176 | ) | |
| (301,238 | ) | |
| 35,750 | |
| |
| | | |
| | | |
| | | |
| | |
Adjustments: | |
| | | |
| | | |
| | | |
| | |
Non-cash/non-recurring operating expense: | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation expense | |
| 3,561 | | |
| 36,023 | | |
| 7,304 | | |
| 37,928 | |
Acquisition-related costs | |
| — | | |
| 552 | | |
| 78 | | |
| 18,894 | |
Change in fair value of derivative asset | |
| 17,749 | | |
| (7,413 | ) | |
| (86,865 | ) | |
| (23,806 | ) |
Change in fair value of contingent consideration | |
| — | | |
| 259 | | |
| 176 | | |
| 444 | |
Realized loss on sale of marketable equity securities | |
| — | | |
| — | | |
| 1,624 | | |
| — | |
Unrealized loss (gain) on marketable equity securities | |
| (142 | ) | |
| 11,151 | | |
| 6,306 | | |
| 10,812 | |
Realized gain on sale/exchange of long-term investment | |
| — | | |
| — | | |
| — | | |
| (26,260 | ) |
Gain on exchange of equipment | |
| (7,667 | ) | |
| — | | |
| (16,281 | ) | |
| — | |
Impairment of goodwill | |
| — | | |
| — | | |
| 335,648 | | |
| — | |
Other (income) expense | |
| — | | |
| 85 | | |
| 59 | | |
| (1,425 | ) |
Other revenue, (income) expense items: | |
| | | |
| | | |
| | | |
| | |
License fees | |
| (25 | ) | |
| (25 | ) | |
| (73 | ) | |
| (73 | ) |
Adjusted EBITDA | |
$ | 166 | | |
$ | 37,456 | | |
$ | (53,262 | ) | |
$ | 52,264 | |
Non-GAAP Adjusted EPS | |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
| | |
| | |
| | |
| |
Diluted net income (loss) per share | |
$ | (0.24 | ) | |
$ | (0.16 | ) | |
$ | (2.64 | ) | |
$ | 0.13 | |
Interest (income) expense | |
| — | | |
| — | | |
| — | | |
| — | |
Income tax expense (benefit) | |
| (0.02 | ) | |
| — | | |
| (0.07 | ) | |
| 0.04 | |
Depreciation and amortization | |
| 0.17 | | |
| 0.13 | | |
| 0.46 | | |
| 0.23 | |
EBITDA | |
| (0.09 | ) | |
| (0.03 | ) | |
| (2.25 | ) | |
| 0.40 | |
| |
| | | |
| | | |
| | | |
| | |
Adjustments: | |
| | | |
| | | |
| | | |
| | |
Non-cash/non-recurring operating expense: | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation expense | |
| 0.02 | | |
| 0.37 | | |
| 0.05 | | |
| 0.42 | |
Acquisition-related costs | |
| — | | |
| 0.01 | | |
| — | | |
| 0.21 | |
Change in fair value of derivative asset | |
| 0.12 | | |
| (0.08 | ) | |
| (0.65 | ) | |
| (0.26 | ) |
Change in fair value of contingent consideration | |
| — | | |
| — | | |
| — | | |
| — | |
Realized loss on sale of marketable equity securities | |
| — | | |
| — | | |
| 0.01 | | |
| — | |
Unrealized loss (gain) on marketable equity securities | |
| — | | |
| 0.12 | | |
| 0.05 | | |
| 0.12 | |
Realized gain on sale/exchange of long-term investment | |
| — | | |
| — | | |
| — | | |
| (0.29 | ) |
Gain on exchange of equipment | |
| (0.05 | ) | |
| — | | |
| (0.12 | ) | |
| — | |
Other (income) expense | |
| — | | |
| — | | |
| — | | |
| (0.02 | ) |
Impairment of goodwill | |
| — | | |
| — | | |
| 2.51 | | |
| — | |
Other revenue, (income) expense items: | |
| | | |
| | | |
| | | |
| | |
License fees | |
| — | | |
| — | | |
| — | | |
| — | |
Adjusted EPS | |
$ | — | | |
$ | 0.39 | | |
$ | (0.40 | ) | |
$ | 0.58 | |
| |
| | | |
| | | |
| | | |
| | |
Diluted weighted average number of shares outstanding | |
| 153,895,123 | | |
| 96,064,036 | | |
| 133,894,338 | | |
| 89,896,374 | |
In addition to the non-GAAP financial measures of
Adjusted EBITDA and Adjusted EPS described above, we believe “Mining revenue in excess of cost of revenues, net of power curtailment
credits”, “Data Center Hosting revenue in excess of cost of revenues, net of power curtailment credits”, “Cost
of revenues – Mining, net of power curtailment credits” and “Cost of revenues – Data Center Hosting, net of power
curtailment credits” are additional performance measurements that represent a key indicator of the Company’s core business
operations of both Bitcoin mining and Data Center Hosting.
We believe our ability to sell power back to the grid
at market-driven spot prices, thereby reducing our operating costs, is integral to our overall strategy, specifically our power management
strategy and our commitment to supporting the ERCOT grid. While participation in various grid demand response programs may impact our
Bitcoin production, we view this as an important part of our partnership-driven approach with ERCOT and our commitment to being a good
corporate citizen in our communities.
We believe netting the power sales against our costs
can be an important financial measure because it allows management, investors, and our board of directors to evaluate and compare our
operating results, including our operating efficiencies, from period-to-period by making such adjustments. We have allocated the
benefit of the power sales to our Data Center Hosting and Mining segments based on their proportional power consumption during the periods
presented.
Mining revenue in excess of cost of revenues, net
of power curtailment credits, Data Center Hosting revenue in excess of cost of revenues, net of power curtailment credits, Cost of revenues
– Mining, net of power curtailment credits and Cost of revenues – Data Center Hosting, net of power curtailment credits are
provided in addition to and should not be considered to be a substitute for, or superior to Revenue – Mining, Revenue – Data
Center Hosting, Cost of revenues – Mining or Cost of revenues – Data Center Hosting as presented in our consolidated statements
of operations.
Reconciliations of these measurements to the most comparable U.S.
GAAP financial metrics for historical periods are presented in the table below:
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Mining: | |
| | |
| | |
| | |
| |
Revenue | |
$ | 22,070 | | |
$ | 53,590 | | |
$ | 126,166 | | |
$ | 108,213 | |
| |
| | | |
| | | |
| | | |
| | |
Cost of revenues | |
| 14,677 | | |
| 13,034 | | |
| 51,766 | | |
| 29,893 | |
Power curtailment credits | |
| (6,104 | ) | |
| — | | |
| (8,175 | ) | |
| — | |
Cost of revenues, net of power curtailment credits | |
| 8,573 | | |
| 13,034 | | |
| 43,591 | | |
| 29,893 | |
| |
| | | |
| | | |
| | | |
| | |
Mining revenue in excess of cost of revenues, net of power curtailment credits | |
$ | 13,497 | | |
$ | 40,556 | | |
$ | 82,575 | | |
$ | 78,320 | |
Mining revenue in excess of cost of revenues, net of power curtailment credits as a percentage of revenue | |
| 61.2 | % | |
| 75.7 | % | |
| 65.4 | % | |
| 72.4 | % |
| |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Data Center Hosting: | |
| | | |
| | | |
| | | |
| | |
Revenue | |
$ | 8,371 | | |
$ | 11,193 | | |
$ | 27,899 | | |
$ | 14,067 | |
| |
| | | |
| | | |
| | | |
| | |
Cost of revenues | |
| 14,223 | | |
$ | 12,581 | | |
$ | 44,392 | | |
$ | 16,317 | |
Power curtailment credits | |
| (6,996 | ) | |
| (2,507 | ) | |
| (13,153 | ) | |
| (3,650 | |
Cost of revenues, net of power curtailment credits | |
| 7,257 | | |
| 10,074 | | |
| 31,239 | | |
| 12,667 | |
| |
| | | |
| | | |
| | | |
| | |
Data Center Hosting revenue in excess of cost of revenues, net of power curtailment credits | |
$ | 1,114 | | |
$ | 1,119 | | |
$ | (3,340 | ) | |
$ | 1,400 | |
Data Center Hosting revenue in excess of cost of revenues, net of power curtailment credits as a percentage of revenue | |
| 13.3 | % | |
| 10.0 | % | |
| (12.0 | )% | |
| 10.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Total power curtailment credits | |
$ | (13,070 | ) | |
$ | (2,507 | ) | |
$ | (21,328 | ) | |
$ | (3,650 | ) |
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2022, we had working capital of approximately
$369.8 million, which included cash and cash equivalents of $255.0 million. We reported net loss of $353.8 million during the nine months
ended September 30, 2022. Net loss included $285.2 million in non-cash items consisting primarily of the change in fair value of our derivative
asset of $86.9 million, the increase in Bitcoin held of $124.7 million, a realized gain on the sale/exchange of Bitcoin of $25.4 million,
the gain on exchange of equipment of $16.3 million, and an income tax benefit of $8.7 million, offset by the impairment of goodwill of
$335.6 million, impairment of Bitcoin of $132.1 million, depreciation and amortization of $61.4 million, an unrealized loss on marketable
equity securities of $6.3 million, stock-based compensation expense of $7.3 million, the realized loss on sale of marketable equity securities
of $1.6 million, and the amortization of our right of use asset of $2.9 million.
Contractual Commitments
At September 30, 2022, we had the following contractual commitments, subject
to future adjustments as provided in the contracts (in thousands):
Agreement
Date (1) | |
| Original
Purchase Commitment | | |
| Open
Purchase Commitment | | |
| Deposit
Balance | | |
Expected
Shipping |
April 5, 2021 | |
$ | 138,506 | | |
$ | 10,395 | | |
$ | 53,070 | | |
Fourth Quarter 2022 |
October 29, 2021 | |
| 56,250 | | |
| (422 | ) | |
| 1,609 | | |
Fourth Quarter 2022 |
November 22, 2021 | |
| 32,550 | | |
| 2,969 | | |
| 21,938 | | |
Fourth Quarter 2022 |
December 10, 2021 | |
| 97,650 | | |
| 11,865 | | |
| 65,814 | | |
Fourth Quarter 2022 |
December 24, 2021 | |
| 202,860 | | |
| 20,118 | | |
| 134,904 | | |
Fourth Quarter 2022 |
Total | |
$ | 527,816 | | |
$ | 44,925 | | |
$ | 277,335 | | |
|
(1)
Pursuant to the Company’s agreements with Bitmain, among other provisions, the
Company is responsible for all shipping charges incurred in connection with the delivery of the miners.
Coinmint Co-location Mining Services Agreement
On April 8, 2020, the Company entered into
an agreement with Coinmint, pursuant to which Coinmint agreed to provide up to approximately 9.5 megawatts of electrical power and to
perform all maintenance necessary to operate the Company’s miners deployed at the Coinmint Facility. In exchange, Coinmint was reimbursed
for direct production expenses and received a performance fee based on the net Bitcoin generated by the Company’s miners deployed
at the Coinmint Facility. The amount of electrical power supplied to the Company’s miners at the Coinmint Facility was subsequently
increased to accommodate the Company’s expanding miner fleet. During the nine months ended September 30, 2022, the Company elected
not to renew its co-location mining services agreement with Coinmint, which was, therefore, terminated automatically by its terms as of
July 8, 2022.
Miners
As of September 30, 2022, the Company had outstanding
executed purchase agreements for the purchase of miners from Bitmain for a total of approximately 12,097 new model S19j Pro miners and
19,947 new model S19XP miners, scheduled to be shipped through December 2022. Pursuant to these agreements, approximately $44.9 million
remains payable to Bitmain, subject to future adjustments as provided in the contracts, in installments in advance of shipment of the
miners, which is scheduled to occur monthly through December 2022.
Development of the Corsicana Facility
Data Center:
During the nine months ended September 30, 2022, the
Company announced that it has initiated a large-scale development to expand its Bitcoin mining and data center hosting capabilities in
Navarro County, Texas with the acquisition of a 265-acre site where the anticipated one-gigawatt Corsicana Facility is being constructed.
The Company received approval from ERCOT for the entire one-gigawatt capacity. The initial phase of the development of the Corsicana Facility
involves the construction on the 265-acre site of 400 megawatts of immersion-cooled Bitcoin mining and data center hosting infrastructure
spread across multiple buildings, as well as a high-voltage power substation and transmission facilities to supply power to the facility.
Construction of the substation and the data centers is expected to be carried out concurrently, with self-mining and data center hosting
operations expected to commence by the fourth quarter of 2023, following the commissioning of the substation, which is expected to be
completed in summer 2023.
This first phase of the development of the
Corsicana Facility includes land acquisition, site preparation, substation development, and 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 development will be approximately $333 million, which is scheduled to be invested over the
remainder of 2022, 2023, and the first quarter of 2024. Through September 30, 2022, the Company has incurred costs of approximately $30
million related to the development of the Corsicana Facility. The acquisition costs include $10 million for land, $15 million of initial
developments costs and a $5 million deposit for future power usage. The Company expects to incur costs of approximately $74.0 million
over the remaining period of 2022, approximately $223.9 million during 2023, and approximately $9.5 million during the first quarter of
2024.
Revenue from Operations
Funding our operations on a go-forward basis will
rely significantly on our ability to mine Bitcoin at a price above our Mining costs and revenue generated from our Data Center Hosting
and Engineering customers. We expect to generate ongoing revenues from Bitcoin rewards from our Mining operations and our ability to liquidate
Bitcoin rewards at future values will be evaluated from time-to-time to generate cash for operations.
Generating Bitcoin rewards, for example, which exceed
our production and overhead costs will determine our ability to report profit margins related to such mining operations, although accounting
for our reported profitability is significantly complex. Furthermore, regardless of our ability to generate cash from the sale of our
Bitcoin from our Mining business, we may need to raise additional capital in the form of equity or debt to fund our operations and pursue
our business strategy.
The ability to raise funds through the sale of equity,
debt financings, or the sale of Bitcoin to maintain our operations is subject to many risks and uncertainties and, even if we were successful,
future equity issuances or convertible debt offerings could result in dilution to our existing stockholders and any future debt or debt
securities may contain covenants that limit our operations or ability to enter into certain transactions. Our ability to realize revenue
through Bitcoin production and successfully convert Bitcoin into cash or fund overhead with Bitcoin is subject to a number of risks, including
regulatory, financial and business risks, many of which are beyond our control. Additionally, we have observed significant historical
volatility in the market price of Bitcoin and, as such, future prices cannot be predicted. See the discussion of risks affecting our business
under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report and in Part I, Item 1A of the 2021 Annual Report.
If we are unable to generate sufficient revenue from
our Mining operations, Data Center Hosting operations or Engineering operations when needed or secure additional sources of funding, it
may be necessary to adjust our strategy or explore other strategic alternatives.
At-the-Market Equity Offering
The Company entered into the Sales Agreement
with the Sales Agents dated March 31, 2022, 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 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 September 30, 2022, the Company had received net proceeds
of approximately $298.4 million (after deducting $6.5 million in commissions and expenses) on sales of 37.1 million shares of common stock
under the Sales Agreement at a weighted average price of $8.23 per share.
Legal Proceedings
The Company is a party in several contractual
lawsuits and has also been named a defendant in several legacy class action and other investor related lawsuits as more fully described
under the heading “Legal Proceedings” in Part I, Item 3 of the 2021 Annual Report and in Note 16. “Commitments and Contingencies”
in the unaudited Notes to Condensed Consolidated Financial Statements included under Part I, Item 1 of this Quarterly Report. While the
Company maintains policies of insurance, such policies may not cover all the costs or expenses associated with responding to such matters
or any liability or settlement associated with any lawsuits and are subject to significant deductible or retention amounts.
Whinstone Related Party Transactions
Included in construction in progress as of September
30, 2022, are deposit payments of approximately $0.1 million that relate to a Whinstone initiative for providing certain on-site temporary
housing for stakeholders, including partners, analysts, stockholders, etc. The initiative arose as a result of limited accommodations
for visitors in the Rockdale, TX, area, which is generally a remote area. The transaction as contemplated would involve Whinstone developing
the temporary housing on land owned by Lyle Theriot (indirectly, through a limited liability company). Mr. Theriot is part of the management
team at Whinstone and is considered a related party of Whinstone. The Company is evaluating certain related party implications of the
initiative on an ongoing basis, under U.S. GAAP and other applicable regulatory reporting requirements including, but not limited to,
the Sarbanes-Oxley Act of 2002.
As part of, and contingent upon the closing
of the Whinstone Acquisition in May 2021, employment agreements were entered into with the founding management team of Whinstone. The
agreements contain customary terms and conditions covering compensation, benefits, duties and services and other terms and conditions.
The agreements provide that services shall initially be provided in the Rockdale, Texas area. The agreements provide that the employee
be reimbursed for reasonable lodging, housing and utilities, travel, and food in area of project sites, and costs of owning and operating
an automobile. Such reimbursed costs have not been material.
During the nine months ended September 30,
2022, a total of $0.7 million was paid in expenses to or on behalf of the Whinstone management team, which included the deposit payments
discussed above, and including reimbursement of expenses previously determined to qualify as reimbursable expenses in accordance with
the respective employment agreements. During the period from the Whinstone acquisition to September 30, 2021, a total of $0.4 million
was paid in expenses to or on behalf of the Whinstone management team, including reimbursement of expenses determined to qualify as reimbursable
expenses in accordance with the respective employment agreements and amounts for reimbursement of ongoing business expenses. Additionally,
during April 2022 Whinstone acquired a 2022 used SUV at a cost of $0.1 million to be used for transport in the local area as well as being
available to the Whinstone management team under their employment agreements.
Operating Activities
Net cash used in operating activities was $0.7 million
during the nine months ended September 30, 2022. Cash was used in operations by net loss of $353.8 million, less non-cash items of $285.2
million in non-cash items consisting primarily of the change in fair value of our derivative asset of $86.9 million, the increase in Bitcoin
held of $124.7 million, a realized gain on the sale/exchange of Bitcoin of $25.4 million, the gain on exchange of equipment of $16.3 million,
and an income tax benefit of $8.8 million, offset by the impairment of goodwill of $335.6 million, impairment of Bitcoin of $132.1 million,
depreciation and amortization of $61.4 million, an unrealized loss on marketable equity securities of $6.3 million, stock-based compensation
expense of $7.3 million, the realized loss on sale of marketable equity securities of $1.6 million, and the amortization of our right
of use asset of $2.9 million. The change in assets and liabilities of $67.9 million consisted primarily of proceeds from sale of Bitcoin
of $52.5 million, change in fair value of future power credits of $43.9 million, and an increase in billings in excess of costs and estimated
earnings of $6.0 million, partially offset by decreased accounts payable and accrued expenses of $10.0 million, increased prepaid expenses
and other current assets of $15.0 million, increased costs and estimated earnings in excess of billings of $5.3 million, decreased deferred
revenue of $1.6 million, increased accounts receivable of $2.0 million, and decreased lease liability of $2.7 million, and increased customer
deposits of $2.1 million.
Net cash used in operating activities was $60.9 million
during the nine months ended September 30, 2021. Cash was generated from operations by income of $11.5 million, less non-cash items of
$66.0 million, consisting primarily of a realized gain on the sale of marketable equity securities of $26.3 million, the change in fair
value of our derivative asset of $23.8 million and the increase in Bitcoin held of $108.1 million, offset by stock-based compensation
expense of $37.9 million, the impairment of Bitcoin of $17.5 million, depreciation and amortization of $20.8 million, an unrealized loss
on marketable securities of $10.8 million, deferred income tax expense of $3.7 million, the issuance of common stock warrants of $1.2
million and the change in fair value of contingent consideration of $0.4 million, net of other immaterial items. The change in assets
and liabilities of $6.4 million consisted primarily of increased customer deposits of $6.1 million, increased accounts receivable of $2.6
million, decreased prepaid expenses and other current assets of $1.2 million, increased accounts payable and accrued expenses of $4.5
million, change in fair value of future power credits of $0.4 million, and decreased deferred revenue of $12.8 million.
Investing Activities
Net cash used in investing activities during
the nine months ended September 30, 2022 was $329.4 million, primarily consisting of deposits on equipment of $194.9 million, purchases
of property and equipment of $129.7 million and cash paid for other deposits of $5.5 million, partially offset by proceeds received of
$0.7 million from the sale of our shares of Mogo.
Net cash used in investing activities during the nine
months ended September 30, 2021 was $221.1 million, primarily consisting of deposits on equipment of $103.2 million, our acquisition of
Whinstone of $40.9 million, net and purchases of property and equipment of $78.9 million, offset by proceeds of $1.8 million received
in connection with the exchange of our shares of Coinsquare Ltd. for
shares of Mogo.
Financing Activities
Net cash provided by financing activities was
$272.8 million during the nine months ended September 30, 2022, which consisted of net proceeds from the issuance of our common stock
in connection with our 2022 ATM Offering of $298.4 million, partially offset by the shares of common stock withheld to satisfy employee
taxes of $9.9 million in connection with the settlement of vested equity awards granted under our 2019 Equity Plan and the payment of
contingent consideration liability of $15.7 million.
Net cash provided by financing activities was $116.5
million during the nine months ended September 30, 2021, which consisted of net proceeds from the issuance of our common stock in connection
with our ATM Offerings of $117.5 million and proceeds received from the exercise of common stock warrants of $0.8 million, offset by the
repurchase of common stock to pay employee withholding taxes of $1.8 million.
Critical Accounting Policies
Our critical accounting policies and significant estimates
are detailed in our 2021 Annual Report. Our critical accounting policies and significant estimates have not changed from those previously
disclosed in our 2021 Annual Report, except for those accounting subjects described under the heading “Recently Issued and Adopted
Accounting Pronouncements” in Note 3. “Basis of Presentation, Summary of Significant Accounting Policies and Recent Accounting
Pronouncements” in the unaudited Notes to Condensed Consolidated Financial Statements included under Part I, Item 1 of this Quarterly
Report.
Recently Issued and Adopted Accounting Pronouncements
The Company has evaluated all recently issued accounting
pronouncements and believes such pronouncements do not have a material effect on the Company’s financial statements. See Note 3.
“Basis of Presentation, Summary of Significant Accounting Policies and Recent Accounting Pronouncements” in the unaudited
Notes to Condensed Consolidated Financial Statements included under Part I, Item 1 of this Quarterly Report.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discussion about our market risk
exposures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements.
For more information regarding the forward-looking statements used in this section and elsewhere in this Quarterly Report, see the Cautionary
Note Regarding Forward-Looking Statements at the forepart of this Quarterly Report.
Risk Regarding the Price of Bitcoin:
Our business and development strategy is focused
on maintaining and expanding our Mining operations to maximize the amount of new Bitcoin rewards we earn. As of September 30, 2022, we
held 6,766 Bitcoin, with a carrying value of $125.2 million, all of which were produced from our Mining operations. The carrying value
of our Bitcoin assets as of September 30, 2022 reflects the $132.1 million of impairment charges we recorded against the carrying value
of our Bitcoin assets during the nine months ended September 30, 2022 due to decreases in the fair value of our Bitcoin assets after receipt.
As discussed under the heading “Bitcoin”
under Note 3. “Basis of Presentation, Summary of Significant Accounting Policies and Recent Accounting Pronouncements” in
the Company’s 2021 Annual Report, the Company’s Bitcoin assets are accounted for as indefinite-lived intangible assets, which
are recorded at fair value upon receipt, and assessed for impairment when events or circumstances occur indicating that it is more likely
than not that the asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted
price of Bitcoin at the time its fair value is being measured. 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.
We cannot accurately predict the future market
price of Bitcoin and, as such, we cannot accurately predict whether we will record impairment of the value of our Bitcoin assets. The
future value of Bitcoin will affect the revenue from our operations, and any future impairment of the value of the Bitcoin we mine and
hold for our account would be reported in our financial statements and results of operations as charges against net income, which could
have a material adverse effect on the market price for our securities.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures:
Our management, with the participation of our
Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial officer), has evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)
as of September 30, 2022 to ensure that the information required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that
information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on
this evaluation, our management concluded that our disclosure controls and procedures were not effective at the reasonable assurance level
as of September 30, 2022, due to the following material weaknesses:
|
1) |
The Company did not design and/or implement user access controls to ensure appropriate segregation of duties that would adequately restrict user and privileged access to the financially relevant systems and data to the appropriate Company personnel. |
|
2) |
The Company did not design and implement program change management controls for certain financially relevant systems to ensure that IT program and data changes affecting the Company’s (i) financial IT applications, (ii) digital currency cold storage wallets and mining equipment, and (iii) underlying accounting records, are identified, tested, authorized and implemented appropriately to validate that data produced by its relevant IT system(s) were complete and accurate. Automated process-level controls and manual controls that are dependent upon the information derived from such financially relevant systems were also determined to be ineffective as a result of such deficiency. |
|
3) |
The Company did not properly design or implement
controls to ensure that data received from third parties is complete and accurate. Such data is relied on by the Company in
determining amounts pertaining to revenue - mining and cryptocurrency assets held is complete and accurate. Automated process-level
controls and manual controls that are dependent upon the information derived from such financially relevant systems were also
determined to be ineffective as a result of such deficiency. |
|
4) |
The Company did not properly design and implement controls to ensure that certain inputs and assumptions utilized in the valuation of intangible assets identified in its accounting for business combinations were reasonable in the circumstances. Such deficiency also resulted in material adjustments required to the Company’s provision for income taxes. |
|
5) |
During testing of procedures during 2021, the Company’s subsidiary, Whinstone, did identify that there were material weaknesses over internal controls at Whinstone. The weaknesses noted that Whinstone did not properly document the design of its internal controls; did not design and implement procedures to ensure proper segregation of duties and all transactions are entered and disclosed timely and accurately in accordance with GAAP, which includes transactions with related parties. |
These material weaknesses create a reasonable
possibility that a material misstatement to our consolidated financial statements or disclosures would not be prevented or detected on
a timely basis.
Remediation
Our Board of Directors and management take
internal control over financial reporting and the integrity of our financial statements seriously. Management continues to work to improve
its controls related to our material weaknesses, specifically relating to user access and change management surrounding the Company’s
IT systems and applications. Management will continue to implement measures to remediate material weaknesses, such that these controls
are designed, implemented, and operating effectively. The remediation actions include: (i) enhancing design and documentation related
to both user access and change management processes and control activities (ii) developing and communicating additional policies and procedures
to govern the area of IT change management, and (iii) developing robust processes to validate all data that is received from third-parties
and relied upon to generate financial statements. To achieve the timely implementation of the above, management has commenced the following
actions and will continue to assess additional opportunities for remediation on an ongoing basis:
|
● |
Engaging a third-party specialist to assist management with improving the Company’s overall control environment, focusing on change management, access, and financial reporting controls . |
|
● |
Implementing new applications and systems that are aligned with management’s focus on creating strong internal controls, as well as complete and accurate financial statements. |
|
● |
Implementing more robust policies and procedures, relating to third-party data as well as the inputs and assumptions utilized in estimates, including in business combination valuations and assessments, to ensure the reliability of controls and financial reporting . |
|
● |
Continuing to increase headcount across the Company, with a particular focus on hiring individuals with strong SOX and internal control backgrounds. |
However, the material weaknesses in our internal
control over financial reporting will not be considered remediated until other ITGCs and process-level controls operate for a sufficient
period of time and can be tested and concluded by management to be designed and operating effectively. We cannot provide any assurance
that these remediation efforts will be successful or that our internal control over financial reporting will be effective as a result
of these efforts. In addition, we continue to evaluate and work to improve our internal control over financial reporting related to the
identified material weaknesses, management may determine to take additional measures to address control deficiencies or determine to modify
the remediation plan described above.
Changes in Internal Control over Financial Reporting:
We are taking the remedial actions described above
and expect to implement them prior to December 31, 2022.
During the fiscal year ended December 31, 2021,
we completed acquisitions of two significant subsidiaries, Whinstone and ESS Metron, and began the process of integrating these acquired
businesses into our own, including incorporating our system of internal controls and procedures with those of our acquired businesses.
As part of our integration of these acquired businesses, we are in the process of incorporating our controls and procedures with respect
to Whinstone’s and ESS Metron’s operations, which we expect to complete as of December 31, 2022. Other than the system and
related process changes associated with these two acquisitions, there have been no changes in our internal control over financial reporting
that occurred during the nine months ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
During 2022 the internal controls of the acquired subsidiaries
are being updated and remediated and will be subject to testing and evaluation by management and our auditors.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Disclosure under this Item is incorporated by reference
to the disclosure provided in this Quarterly Report under Part I, Item 1., Financial Statements in Note 16. “Commitments and Contingencies”
to these unaudited Notes to Condensed Consolidated Financial Statements.
Item 1A. Risk Factors
Certain factors may have a materially adverse
effect on our business, financial condition, and results of operations, including the risk, factors, and uncertainties described under
this Part II, Item 1A, and elsewhere in this Quarterly Report, as well as the various risks, factors and uncertainties discussed under
the heading “Risk Factors” under Part I, Item 1A of the 2021 Annual Report, as well as elsewhere in the 2021 Annual Report
and in the other filings we make with the SEC, including our quarterly reports on Form 10-Q for the three months ended March 31, 2022
and June 30, 2022, as filed with the SEC on May 10, 2022 and August 15, 2022, respectively. This is not an exhaustive list, and there
are other factors that may be applicable to our business that are not currently known to us or that we currently do not believe are material.
Any of these risks could have an adverse effect on our business, financial condition, operating results, or prospects, which could cause
the trading price of our common stock to decline, and you could lose part or all of your investment. You should carefully consider the
risks, factors, and uncertainties described below, together with the other information contained in this Quarterly Report, as well as
the risk, factors, uncertainties, and other information we disclosed in our 2021 Annual report and in the other filings we make with
the SEC before making an investment decision regarding our securities.
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds
N/A - none.
Item 3. Defaults Upon Senior Securities
N/A - none.
Item 4. Mine Safety Disclosures
N/A - none.
Item 5. Other Information
N/A - none.
Item 6. Exhibits
Exhibit Number |
|
Description of Document |
|
3.1 |
|
Articles of Incorporation filed September 20, 2017 (Incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed September 25, 2017). |
|
3.2 |
|
Bylaws effective September 20, 2017 (Incorporated by reference to Exhibit 3.2 of the Current Report on Form 8-K filed September 25, 2017). |
|
3.3 |
|
Amendment to Bylaws effective March 9, 2018 (Incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed March 12, 2018). |
|
3.4 |
|
Articles of Merger between Bioptix, Inc. and Riot Blockchain, Inc. (Incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed October 4, 2017). |
|
4.1+* |
|
Third Amendment to the Riot Blockchain, Inc. 2019 Equity Incentive Plan. |
|
10.1+* |
|
Form of Service-Based Restricted Stock Award Agreement. |
|
10.2+* |
|
Form of Performance-Based Restricted Stock Award Agreement. |
|
10.3+* |
|
Form of Executive Employment Agreement. |
|
31. |
|
Rule 13a-14(a)/15d-14(a) Certifications. |
|
31.1* |
|
Rule 13a-14(a)/15d-14(a)
- Certification of Chief Executive Officer (principal executive officer). * |
|
31.2* |
|
Rule 13a-14(a)/15d-14(a) - Certification of Chief Financial Officer (principal financial officer). * |
|
32. |
|
Section 1350 Certification |
|
32.1* |
|
Section 1350 Certification of Chief Executive Officer (principal executive officer). |
|
32.2* |
|
Section 1350 Certification of Chief Financial Officer (principal financial officer). |
|
101* |
|
The following unaudited condensed consolidated financial statements from this Quarterly Report, formatted in iXBRL (inline eXtensible Business Reporting Language) includes: (i) the Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 (Unaudited); (ii) the Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited); (iii) the Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited); (iv) the Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (Unaudited); and (v) the Notes to Unaudited Condensed Consolidated Financial Statements.* |
|
104* |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).* |
|
* |
|
Filed herewith. |
+ |
|
Indicates a management contract or compensatory plan
or arrangement. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto
duly authorized on November 7, 2022.
|
Riot Blockchain, Inc.
(Registrant) |
|
|
Dated: November 7, 2022 |
/s/ Jason Les |
|
Jason Les |
|
Chief Executive Officer
(Principal Executive Officer) |
|
|
|
/s/ Colin Yee |
|
Colin Yee |
|
Chief Financial Officer
(Principal Financial Officer) |
Pursuant to the Company’s agreements with Bitmain, among other provisions, the Company is responsible for all shipping charges incurred in connection with the delivery of the miners.
Amounts primarily include common area maintenance and utility charges not included in the measurement of right of use assets and operating lease liabilities.
false
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