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 June 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 August 11, 2022 was 154,536,152.

 

 
 

RIOT BLOCKCHAIN, INC. 

    Page
  PART I - FINANCIAL INFORMATION  
     
Item 1. Financial Statements (Unaudited) 1
  Condensed Consolidated Balance Sheets as of June 30, 2022 (Unaudited) and December 31, 2021 1
  Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2022 and 2021 (Unaudited) 2
  Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2022 and 2021 (Unaudited) 3
  Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021 (Unaudited) 5
  Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk 39
Item 4. Controls and Procedures 39
     
  PART II - OTHER INFORMATION  
     
Item 1. Legal Proceedings 40
Item 1A. Risk Factors 40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 40
Item 3. Defaults Upon Senior Securities 41
Item 4. Mine Safety Disclosures 41
Item 5. Other Information 41
Item 6. Exhibits 41
Signatures  42

 

 

 

i 
 

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 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 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;  

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 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 the new miners, parts, or services we purchase from them, as well as other risks we may not anticipate;

 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 and 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;

 

ii 
 

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 goodwill, amortizable intangible assets, or Bitcoin holdings become impaired due to a change in circumstances indicating that these assets’ carrying value may not be recoverable, such as a sustained decline in the value of a Bitcoin from the value recorded when we mine 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 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 or arbitration 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 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.

  

iii 
 

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)

 

   June 30, 2022   December 31, 2021 
ASSETS   (Unaudited)      
Current assets          
Cash and cash equivalents  $270,483   $312,315 
Accounts receivable   16,091    15,398 
Costs and estimated earnings in excess of billings   13,779    9,862 
Prepaid expenses and other current assets   12,999    7,135 
Cryptocurrencies   126,574    159,544 
Future power credits, current portion   54,477    58,481 
Investments in marketable equity securities, at fair value   2,028    10,804 
Total current assets   496,431    573,539 
Property and equipment, net   411,244    262,980 
Deposits   363,010    266,170 
Intangible assets, net   13,371    14,162 
Goodwill   —      349,063 
Derivative asset   130,693    26,079 
Right of use assets   21,166    13,189 
Future power credits, less current portion   
—  
    25,447 
Other long-term assets   310    310 
Total assets  $1,436,225   $1,530,939 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities          
Accounts payable  $18,761   $20,037 
Billings in excess of costs and estimated earnings   6,389    5,264 
Accrued compensation   3,247    5,927 
Accrued expenses   13,524    16,144 
Deferred revenue, current portion   2,651    2,843 
Contingent consideration liability - future power credits, current portion   54,477    58,481 
Operating lease liability, current portion   1,518    1,182 
Total current liabilities   100,567    109,878 
           
Deferred revenue, less current portion   18,851    19,796 
Operating lease liability, less current portion   19,968    12,257 
Contingent consideration liability - future power credits, less current portion   
—  
    25,447 
Other long-term liabilities   8,274    6,241 
Total liabilities   147,660    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 June 30, 2022 and December 31, 2021   
—  
    
—  
 
0% Series B Convertible stock, 1,750,001 shares authorized; no shares issued and outstanding as of June 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; 147,986,173 and 116,748,472 shares issued and outstanding as of June 30, 2022 and December 31, 2021   1,857,108    1,595,147 
Accumulated deficit   (568,543)   (237,838)
Total stockholders' equity   1,288,565    1,357,320 
Total liabilities and stockholders' equity  $1,436,225   $1,530,939 

 

 

  See the accompanying Notes to Condensed Consolidated Financial Statements,
which are an integral part of these Condensed Consolidated Financial Statements.

 

 

1 
 

Riot Blockchain, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(in thousands, except for share and per share amounts)

(Unaudited)

 

 

 

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2022   2021   2022   2021 
Revenue, net:                    
 Mining  $46,151   $31,450   $104,096   $54,623 
 Data Center Hosting   9,834    2,874    19,528    2,874 
 Engineering   16,938    
—  
    29,062    
—  
 
 Other revenue   24    24    48    48 
 Total revenue   72,947    34,348    152,734    57,545 
                     
 Costs and expenses:                    
 Cost of revenues (exclusive of depreciation and amortization shown below):                    
     Mining   17,995    9,325    37,089    16,859 
     Data Center Hosting   15,184    3,736    30,169    3,736 
     Engineering   15,175    
—  
    26,724    
—  
 
 Acquisition-related costs   
—  
    17,032    78    18,342 
 Selling, general and administrative   10,713    3,512    21,545    7,664 
 Depreciation and amortization   20,562    5,738    34,807    8,584 
 Change in fair value of derivative asset   (60,931)   (16,393)   (104,614)   (16,393)
 Power curtailment credits   (5,706)   (1,143)   (8,258)   (1,143)
 Change in fair value of contingent  consideration   
—  
    185    176    185 
 Realized gain on sale/exchange of  cryptocurrencies   (14,353)   (29)   (23,589)   (29)
 Gain on exchange of equipment   

(8,614

)   
—  
    

(8,614

)   
—  
 
 Impairment of cryptocurrencies   99,787    17,507    126,177    17,507 
 Impairment of goodwill   349,148    —      349,148    —   
 Total costs and expenses   

438,960

    39,470    

480,838

    55,312 
 Operating income (loss)   (366,013)   (5,122)   (328,104)   2,233 
                     
 Other income (expense):                    
 Interest income (expense)   
—  
    80    (357)   255 
 Realized loss on sale of marketable equity securities   (1,624)   
—  
    (1,624)   
—  
 
 Realized gain on sale/exchange of long-term investment   
—  
    26,260    
—  
    26,260 
 Unrealized gain (loss) on marketable equity securities   (4,837)   339    (6,448)   339 
 Other income (expense)   (59)   1,510    (59)   1,510 
 Total other income (expense)   (6,520)   28,189    (8,488)   28,364 
                     
 Net income (loss) before taxes   (372,533)   23,067    (336,592)   30,597 
                     
 Current income tax benefit (expense)   (427)   
—  
    (739)   
—  
 
 Deferred income tax benefit (expense)   6,626    (3,730)   6,626    (3,730)
Total income tax benefit (expense)  $6,199   $(3,730)  $5,887   $(3,730)
                     
 Net income (loss)  $(366,334)  $19,337   $(330,705)  $26,867 
                     
Basic net income (loss) per share  $(2.81)  $0.22   $(2.67)  $0.31 
Diluted net income (loss) per share  $(2.81)  $0.22   $(2.67)  $0.31 
                     
                     
Basic weighted average number of shares outstanding   130,405,502    88,681,338    123,760,839    85,937,612 
Diluted weighted average number of shares outstanding   130,405,502    89,241,044    123,760,839    86,501,471 

 

 

 

 See the accompanying Notes to Condensed Consolidated Financial Statements,
which are an integral part of these Condensed Consolidated Financial Statements.

 

 

2 
 

 

Riot Blockchain, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except for share and per share amounts)

(Unaudited) 

 

 

 Three Months Ended June 30, 2022

 

                                  Total  
    Preferred Stock     Common Stock     Accumulated     stockholders'  
    Shares     Amount     Shares     Amount     deficit     equity  
Balance as of April 1, 2022     —       $ —         117,304,304     $ 1,589,893     $ (202,209 )   $ 1,387,684  
Delivery of common stock underlying restricted stock units, net of shares settled for tax withholding settlement    
—  
     
—  
      122,052       (508 )    
—  
      (508 )
Issuance of common stock/At-the-market offering, net of offering costs    
—  
     
—  
      30,559,817       267,022      
—  
      267,022  
Stock-based compensation     —        
—  
      —         701      
—  
      701  
Net loss     —        
—  
      —        
—  
      (366,334 )     (366,334 )
Balance as of June 30, 2022     —       $ —         147,986,173     $ 1,857,108     $ (568,543 )   $ 1,288,565  

 

 

Three Months Ended June 30, 2021 

 

                       Total 
   Preferred Stock   Common Stock   Accumulated   stockholders' 
   Shares   Amount   Shares   Amount   deficit   equity 
Balance as of April 1, 2021   2,199   $11    84,120,723   $590,188   $(222,382)  $367,817 
Delivery of common stock underlying restricted stock units, net of shares settled for tax withholding settlement   
—  
    
—  
    27,509    (113)   
—  
    (113)
Issuance of common stock in connection with the acquisition of Whinstone   
—  
    
—  
    11,800,000    326,152    
—  
    326,152 
Stock-based compensation   —      
—  
    —      970    
—  
    970 
Net income   —      
—  
    —      
—  
    19,337    19,337 
Balance as of June 30, 2021   2,199   $11    95,948,232   $917,197   $(203,045)  $714,163 

 

See the accompanying Notes to Condensed Consolidated Financial Statements,
which are an integral part of these Condensed Consolidated Financial Statements.

 

3 
 

 

Riot Blockchain, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except for share and per share amounts)

(Unaudited) 

 

Six Months Ended June 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    
—  
     
—  
      675,685       (8,815 )    
—  
      (8,815 )
Issuance of common stock/At-the-market offering, net of offering costs    
—  
     
—  
      30,559,817       267,022      
—  
      267,022  
Conversion of preferred stock to common stock     (2,199 )     (11 )     2,199       11      
—  
     
—  
 
Stock-based compensation     —        
—  
      —         3,743      
—  
      3,743  
Net loss     —        
—  
      —        
—  
      (330,705     (330,705
Balance as of June 30, 2022     —       $ —         147,986,173     $ 1,857,108     $ (568,543 )   $ 1,288,565  

 

 

Six Months Ended June 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   
—  
    
—  
    229,904    (1,318)   
—  
    (1,318)
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   
—  
    
—  
    4,433,468    82,680    
—  
    82,680 
Conversion of preferred stock to common stock   (2,000)   (11)   2,000    11    
—  
    
—  
 
Stock-based compensation   —      
—  
    —      1,905    
—  
    1,905 
Net income   —      
—  
    —      
—  
    26,867    26,867 
Balance as of June 30, 2021   2,199   $11    95,948,232   $917,197   $(203,045)  $714,163 

See the accompanying Notes to Condensed Consolidated Financial Statements,
which are an integral part of these Condensed Consolidated Financial Statements.

 

4 
 

 

Riot Blockchain, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited) 

 

 

 

   Six Months Ended June 30, 
   2022   2021 
 Cash flows from operating activities          
 Net income (loss)  $(330,705)  $26,867 
 Adjustments to reconcile net income to net cash used in operating activities:          
 Stock-based compensation   3,743    1,905 
 Depreciation and amortization   34,807    8,584 
 Amortization of license fee revenue   (48)   (48)
 Amortization of right of use assets   807    54 
 Income tax expense   (5,887)   3,730 
 Impairment of cryptocurrencies   126,177    17,507 
 Impairment of goodwill   349,148    —   
 Change in fair value of derivative asset   (104,614)   (16,393)
 Change in fair value of contingent consideration   176    
—  
 
 Realized loss on sale of marketable equity securities   1,624    
—  
 
 Realized gain on sale/exchange of long-term investment   
—  
    (26,260)
 Realized gain on sale/exchange of cryptocurrencies   (23,589)   (29)
 Unrealized (gain)/loss on marketable equity securities   6,448    (339)
 Gain on exchange of equipment   (8,614)   
—  
 
 Cryptocurrencies - mining, net   (102,734)   (54,106)
 Changes in assets and liabilities:          
 Proceeds from sale of cryptocurrencies   33,116    
—  
 
 Accounts receivable   (693)   1,045 
 Costs and estimated earnings in excess of billings   (3,917)   
—  
 
 Prepaid expenses and other current assets   (5,858)   2,373 
 Future power credits   29,451    
—  
 
 Accounts payable   (1,276)   15,036 
 Billings in excess of costs and estimated earnings   1,125    
—  
 
 Accrued compensation   (2,680)   659 
 Accrued expenses   (10,607)   1,720 
 Customer deposits   2,032    2,693 
 Deferred revenue   (1,089)   (12,071)
 Lease liability   (736)   (87)
 Net cash used in operating activities   (14,393)   (27,160)
           
 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   (192,485)   (84,986)
 Other deposits   (709)   
—  
 
 Purchases of property and equipment, including construction in progress   (77,403)   (7,126)
 Patent costs incurred   (28)   (16)
 Net cash used in investing activities   (269,921)   (131,207)
           
 Cash flows from financing activities          
 Proceeds from the issuance of common stock / At-the-market offering   272,737    84,817 
 Offering costs for the issuance of common stock / At-the-market offering   (5,715)   (2,137)
 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   (8,815)   (1,318)
 Net cash provided by financing activities   242,482    82,168 
           
 Net decrease in cash and cash equivalents   (41,832)   (76,199)
 Cash and cash equivalents at beginning of period   312,315    223,382 
 Cash and cash equivalents at end of period  $270,483   $147,183 
           
 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  $96,348   $40,993 
 Conversion of preferred stock to common stock  $11   $11 
 Property and equipment obtained in exchange transaction  $10,409   $
—  
 

 

 

See the accompanying Notes to Condensed Consolidated Financial Statements,
which are an integral part of these Condensed Consolidated Financial Statements.

 

5 
 

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 “Whinstone Facility”), with 700 megawatts in total 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 for both our Bitcoin mining operations and to host institutional-scale Bitcoin mining and data center clients upon completion. Our Whinstone Facility is believed to be the largest Bitcoin mining facility in North America, as measured by developed capacity, and we are currently expanding its capacity.

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 capital.

As described in Note 17. “Segment Information” to these unaudited Notes to Condensed Consolidated Financial Statements, we operate in three business segments: (1) Bitcoin Mining (“Mining”), (2) Data Center Hosting (“Data Center Hosting”), and (3) Electrical Products and Engineering (“Engineering”).

Note 2. Liquidity and Financial Condition 

At June 30, 2022, the Company had approximate balances of cash and cash equivalents of $270.5 million, working capital of $395.9 million, total stockholders’ equity of $1.3 billion and an accumulated deficit of $568.5 million. To date, the Company has, in large part, relied on equity financings to fund its operations. During the six months ended June 30, 2022, the Company sold 1,000 Bitcoin for proceeds of approximately $33.1 million. The Company is monitoring its balance sheet on an ongoing basis, evaluating the level of Bitcoin retained from monthly production in consideration of operational and expansion cash requirements. The Company continues to hold a long-term view on its Bitcoin holdings and believes it is in the best interest of its stockholders to have Bitcoin on its balance sheet. The Company believes its current cash and Bitcoin on hand is sufficient to meet its operating and capital requirements for at least one year from the date these unaudited condensed consolidated financial statements are issued.

During the six months ended June 30, 2022, the Company paid approximately $192.5 million as deposits primarily for miners and as of June 30, 2022, reclassified $96.3 million to property and equipment in connection with the deployment of miners at the Whinstone Facility. During the six months ended June 30, 2022, the Company received 17,438 miners at the Whinstone 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 June 30, 2022, the Company received net proceeds on sales of 30,559,817 million shares of common stock under the Sales Agreement of approximately $267.0 million (after deducting $5.7 million in commissions and expenses) at a weighted average price of $8.92 per share.

6 
 

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 as a result of the COVID-19 pandemic and it is likely to continue to result in significant national and global economic disruption, which may adversely affect our business. Based on our current assessment, however, we do not expect any material impact on our long-term development, our operations, or our liquidity due to the worldwide spread of COVID-19, other than the potential impacts of COVID-19 on global logistics discussed below. We 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 any delivery delays to avoid materially impacting our miner deployment schedule; however, there are no assurances we will be able to continue to mitigate any such delivery delays in the future. Additionally, the expansion of the Whinstone Facility and the development of our new Corsicana Facility requires large quantities of construction materials, specialized electricity distribution equipment and other component parts that can be difficult to source. We have procured and hold many of the required materials to help mitigate against global supply logistic and pricing concerns. We monitor developments in the global supply chain and how that may potentially impact our expansion plans. See the discussion under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report and under Part I, Item 1A of the 2021 Annual Report for additional discussion regarding potential impacts the global supply chain crisis may have on our operations and plans for expansion.

Note 3. Basis of Presentation, Summary of Significant Accounting Policies and Recent Accounting Pronouncements

Basis of Presentation and Principles of Consolidation:

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the SEC. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of such interim results. Amounts are in thousands except for share, per share and miner amounts.

The results for the unaudited condensed consolidated statements of operations are not necessarily indicative of results to be expected for the fiscal year ending December 31, 2022 or for any future interim period. The unaudited condensed consolidated financial statements do not include all the information and notes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the fiscal year ended December 31, 2021 and notes thereto included in the Company’s 2021 Annual Report on Form 10-K filed with the SEC on March 16, 2022.

Reclassifications: 

Certain prior period amounts have been reclassified to conform to the current period presentation in the consolidated financial statements and these accompanying notes. The reclassifications did not have a material impact on the Company's unaudited condensed consolidated financial statements and related disclosures. The impact on any prior period disclosures was immaterial.

7 
 

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 has three operating segments as of June 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.

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 restricted stock units (“RSUs”) and the holdback of 70,165 shares as security for the ESS Metron sellers’ indemnification obligations under the December 1, 2021 membership interest purchase agreement covering the acquisition, from the net income (loss) per share calculation.

 

8 
 

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited) 

 

For the three and six months ended June 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, restricted stock shares, warrants and the outstanding shares of the Company’s 0% Series B Convertible Preferred Stock (the “Series B Preferred Stock”). Potentially dilutive shares are determined by applying the treasury stock method to the assumed exercise of outstanding stock options, restricted stock awards and warrants. Potentially dilutive shares issuable upon conversion of our Series B Preferred Stock for 2021 are calculated using the if-converted method. During the six months ended June 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 June 30,   Six Months Ended June 30, 
   2022   2021   2022   2021 
Basic and diluted income (loss) per share:                    
Net income (loss)  $(366,334)  $19,337   $(330,705)  $26,867 
                     
Basic weighted average number of shares outstanding   130,405,502    88,681,338    123,760,839    85,937,612 
Add:                    
Options to purchase common stock   
—  
    10,627    
—  
    10,697 
Unvested restricted stock awards   
—  
    546,880    
—  
    550,759 
Convertible Series B preferred shares   
—  
    2,199    
—  
    2,403 
Diluted weighted average number of shares outstanding   130,405,502    89,241,044    123,760,839    86,501,471 
                     
Basic net income (loss) per share  $(2.81)  $0.22   $(2.67)  $0.31 
                     
Diluted net income (loss) per share  $(2.81)  $0.22   $(2.67)  $0.31 

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 June 30, 2022 because their inclusion would be anti-dilutive are as follows:

   June 30, 2022 
Warrants to purchase common stock   63,000 
Unvested restricted stock awards   4,244,534 
Total   4,307,534 

 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.

 

9 
 

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)  

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 become an industry-leading, vertically-integrated Bitcoin mining platform on a global scale.

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.

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 related volatility of equity markets, especially in Riot’s industry, as evidenced by declines in the market price of the Company’s securities, those of its peers, and major market indices, during the three and six months ended June 30, 2022, the Company recognized a non-cash impairment charge of $349.1 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 for further details.

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 actually would have resulted had the combination occurred on January 1, 2020, or of future results of the consolidated entities. This unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of future operating results of the combined company (in thousands).

 

10 
 

 

   Three Months Ended
June 30,
   Six Months
Ended
 June 30,
 
   2021   2021 
Total revenue  $40,628   $67,886 
Net income  $22,657   $122,151 

Acquisition of Corsicana Facility Land Site:

During the six months ended June 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 operations commencing 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 June 30, 2022, the Company has incurred costs of approximately $10.1 million related to the development of the Corsicana Facility.

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 June 30,   Six Months Ended June 30, 
   2022   2021   2022   2021 
Mining  $46,151   $31,450   $104,096   $54,623 
Data Center Hosting   9,834    2,874    19,528    2,874 
Engineering   16,938    
—  
    29,062    
—  
 
Other   24    24    48    48 
Total revenue  $72,947   $34,348   $152,734   $57,545 

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 $13.8 million and $9.9 million as of June 30, 2022 and December 31, 2021, respectively.

11 
 

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited) 

The Company’s contract liabilities primarily relate to upfront payments and consideration received from customers for Data Center Hosting, billings in excess of costs and estimated earnings on uncompleted Engineering contracts and the upfront license fee generated from our legacy animal health business. The table below presents changes in the total deferred revenue liability and billings in excess of costs and estimated earnings, for the six months ended June 30, 2022 (in thousands):

 

Beginning balance - January 1, 2022  $27,903 
Revenue recognized   (1,137)
Billings in excess of costs and estimated earnings   1,125 
Ending balance - June 30, 2022  $27,891 

Transaction price allocated to remaining performance obligations:

Remaining performance obligations represent the transaction price of contracts for work that has not yet been performed. Amounts related to Bitcoin mining are not included because the Company elected the practical expedient to not disclose amounts related to contracts with a duration of one year or less.

Additionally, we have elected to use the practical expedient to not adjust the transaction price for the existence of a significant financing component if the timing difference between a customer’s payment and our performance is one year or less.

Note 6. Cryptocurrencies 

The following table presents additional information about the Company’s Bitcoin:

 

Beginning balance - January 1, 2022  $159,544 
Revenue recognized from cryptocurrencies mined   104,096 
Proceeds from sale of cryptocurrencies   (33,116)
Exchange of Bitcoin for employee compensation   (1,362)
Realized gain on sale/exchange of cryptocurrencies   23,589 
Impairment of cryptocurrencies   (126,177)
Ending balance - June 30, 2022  $126,574 

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 and six months ended June 30, 2022, the Company recorded an unrealized loss on the remaining 2.4 million shares of Mogo of approximately $4.8 million and $6.4 million, respectively, based on the closing price per share of Mogo common stock on the Nasdaq Stock Market on June 30, 2022 of $0.86. During the three and six months ended June 30, 2021, the Company recorded an unrealized gain of $0.3 million in each period on its original 3.2 million shares of Mogo. The daily share price of Mogo is extremely volatile and may be more or less than the amount recorded as of June 30, 2022.

 

12 
 

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited) 

Note 8. Property and Equipment 

Property and equipment: 

Property and equipment consisted of the following as of June 30, 2022 and December 31, 2021:

   Life (Years)   June 30, 2022   December 31, 2021 
Buildings and building improvements   10-25   $154,960   $78,548 
Land rights and land improvements   n/a    10,089    
—  
 
Miners and mining equipment   2    193,486    87,921 
Machinery and facility equipment   5-7    16,848    12,373 
Office and computer equipment   3    1,088    1,007 
Construction in progress        93,375    113,598 
Total cost of property and equipment        469,846    293,447 
Less accumulated depreciation        (58,602)   (30,467)
Property and equipment, net       $411,244   $262,980 

During the six months ended June 30, 2022, the Company had deployed a total of 44,720 miners in its mining operation.

During the six months ended June 30, 2022, the Company paid approximately $192.5 million as deposits, primarily for ASIC miners, which are scheduled to be delivered monthly through December 2022. As of June 30, 2022, the Company reclassified $96.3 million to property and equipment in connection with the deployment of miners at the Whinstone Facility. During the six months ended June 30, 2022, the Company received 17,438 miners at the Whinstone Facility.

During the six months ended June 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 Whinstone 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 Whinstone Facility. Pursuant to the Swap Agreement, the miner exchange occurred in two stages, with the first exchange occurring in June 2022, and the second exchange occurring 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 Whinstone Facility. In accordance with ASC 610-20, Sales and transfers of nonfinancial assets, (“ASC 610-20”), during the three and six months ended June 30, 2022, the Company recognized a gain on exchange of equipment of $8.6 million associated with the miners exchanged in June.

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 June 30, 2022, approximately $110.6 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 with construction in progress as of June 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, shareholders, 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), who is part of the management team at Whinstone and who is considered a related party of Whinstone and who is considered a related party of Whinstone.. The Company is evaluating certain related party implications of the initiative, under U.S. GAAP and other applicable regulatory reporting requirements such as the Sarbanes-Oxley Act of 2002.

Depreciation is computed on the straight-line basis for the periods the assets are in service.

13 
 

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited) 

Commitment:

As of June 30, 2022, the Company had outstanding executed purchase agreements for the purchase of miners from Bitmain for a total of approximately 26,361 new model S19j Pro miners and 30,000 new model S19XP miners. Miners are scheduled to be delivered through December 2022, and the Company paid a deposit of 68% of the total purchase price. A summary of the purchase agreement commitments, deposits paid and expected delivery timing (remaining balances are payable in advance of shipping) is summarized as follows (in thousands):

Agreement Date (1)  Original Purchase Commitment   Open Purchase Commitment   Deposit Balance   Expected Shipping
April 5, 2021  $138,506   $17,068   $85,095   Third Quarter 2022 – Fourth Quarter 2022
October 29, 2021  $56,250   $10,800   $41,864   Third Quarter 2022 – Fourth Quarter 2022
November 22, 2021  $32,550   $8,085   $21,402   Third Quarter 2022 – Fourth Quarter 2022
December 10, 2021  $97,650   $24,255   $68,124   Third Quarter 2022 – Fourth Quarter 2022
December 24, 2021  $202,860   $50,400   $140,868   Third Quarter 2022 – Fourth Quarter 2022
Total  $527,816   $110,608   $357,353    

(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 June 30, 2022 and December 31, 2021:

 

    Gross book value     Accumulated amortization     Net book value     Weighted-average life (years)  
Customer contracts   $ 6,300     $ (362 )   $ 5,938       10  
Trademark     5,000       (292 )     4,708       10  
UL Listings     2,700       (131 )     2,569       12  
Patents     561       (405 )     156      
Various
 
Intangible assets, net as of June 30, 2022   $ 14,561     $ (1,190 )   $ 13,371          

  

   Gross book value   Accumulated amortization   Net book value   Weighted-average life (years) 
Customer contracts  $6,300   $(51)  $6,249    10 
Trademark   5,000    (42)   4,958    10 
UL Listings   2,700    (19)   2,681    12 
Patents   742    (468)   274    
Various
 
Intangible assets, net as of December 31, 2021  $14,742   $(580)  $14,162      

 

The intangible assets are being amortized over their respective original useful lives, which range from 10-12 years. The Company recorded amortization expense of $0.3 million and $0.03 million for the three months ended June 30, 2022 and 2021, respectively. The Company recorded amortization expense of $0.7 million and $0.05 million for the six months ended June 30, 2022 and 2021, respectively.

 

 

14 
 

 

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 six months ending December 31, 2022  $721 
For the year ended December 31, 2023   1,390 
For the year ended December 31, 2024   1,380 
For the year ended December 31, 2025   1,378 
For the year ended December 31, 2026   1,376 
For the year ended December 31, 2027   1,367 
For the year ended December 31, 2028 and thereafter   5,759 
Total  $13,371 

Goodwill:

The following table represents the changes in goodwill for the six months ended June 30, 2022:

 

Balance at January 1, 2022  $349,063 
     Impairment   (349,148)
     ESS Metron purchase accounting adjustment   85 
Balance at June 30, 2022  $
—  
 

 

Goodwill represents the excess future economic benefits of a business combination and is measured as the excess of consideration transferred over the fair value of the assets acquired and liabilities assumed in a business combination. Accounting for goodwill involves significant management judgment both in the initial measurement through purchase price allocations of business combinations and valuations of assets acquired within those business combinations and in the ongoing assessment of impairment. Goodwill is not amortized, but instead is tested for impairment annually during the fourth quarter each year or more frequently if events or changes in circumstances indicate that the asset might be impaired.

When assessing goodwill for impairment, first, qualitative factors are assessed to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. A qualitative impairment assessment involves analyzing relevant events and circumstances, with greater weight assigned to events and circumstances that most affect the fair value or the carrying amounts of a reporting unit’s assets. Items that are generally considered include, but are not limited to, the following: macroeconomic conditions, industry and market conditions and overall financial performance. If the results of the qualitative assessment are not conclusive, a quantitative goodwill test is performed. The quantitative goodwill test compares the estimated fair value of each reporting unit with its carrying value (including goodwill). If the reporting unit’s estimated fair value exceeds its net book value, goodwill is not impaired. An impairment is recognized if the estimated fair value of a reporting unit is less than its net book value, in an amount not to exceed the carrying value of the reporting unit’s goodwill.

During the second quarter of 2022, 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, 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, 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%.

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 $349.1 million was recognized as a non-cash impairment charge during the three and six months ended June 30, 2022.

15 
 

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

 (Unaudited) 

Note 10. Long-Term Assets

Deposits:

Deposits consisted of the following as of June 30, 2022:

Deposits on equipment    
Beginning balance at January 1, 2022  $261,215 
Additions   192,485 
Reclassification to equipment   (96,348)
Ending balance   357,352 
Security and other deposits   5,658 
Deposits at June 30, 2022  $363,010 

Deposits on Equipment:

During the six months ended June 30, 2022, the Company paid approximately $192.5 million as deposits, primarily for miners, and, as of June 30, 2022, reclassified $96.3 million to property and equipment in connection with the deployment of miners at the Whinstone Facility. See Note 8. “Property and Equipment” to these unaudited Notes to Condensed Consolidated Financial Statements.

Right of Use Assets:

See Note 12. “Leases” to these unaudited Notes to Condensed Consolidated Financial Statements.

 

16 
 

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited) 

Note 11. Accrued Expenses

As of June 30, 2022 and December 31, 2021, the Company’s accrued expenses consisted of the following:

   June 30, 2022   December 31, 2021 
Construction in progress  $2,020   $12,110 
Power supply   9,517    
—  
 
Insurance   32    2,507 
Other   1,955    1,527 
Total accrued expenses  $13,524   $16,144 

Note 12. Leases

At June 30, 2022, the Company had operating lease liabilities and right of use assets for its offices, manufacturing facilities of ESS Metron, and a ground lease at the Whinstone Facility that expire on various dates through January 2032, inclusive of extension options the Company is reasonably certain will be exercised.

Rental expense for lease payments related to the Company’s operating leases is recognized on a straight-line basis over the remaining lease term. The Company currently does not hold any finance leases. The Company elected to use the practical expedient of not separating lease components for its real estate leases. The Company has elected the short-term lease exception provided, and therefore only recognizes right of use assets and lease liabilities for leases with a term greater than one year. Leases qualifying for the short-term lease exception were insignificant.

As of June 30, 2022 and December 31, 2021, the right of use assets were $21.2 million and $13.2 million, respectively, and the operating lease liabilities were $21.5 million and $13.4 million, respectively, in the accompanying unaudited condensed consolidated balance sheets related to our ground lease and office leases. Operating lease right of use assets are included within long-term assets on the unaudited condensed consolidated balance sheets.

The calculation of the right of use assets and lease liabilities include minimum lease payments over the remaining lease term. Variable lease payments are excluded from the amounts and are recognized in earnings in the period in which the obligation for those payments is incurred. To determine the present value of future minimum lease payments, the Company utilized its incremental borrowing rate adjusted for the remaining lease term and the form of underlying collateral. The discount rate implicit in the leases was not readily determinable.

During the six months ended June 30, 2022, the Company executed a third lease amendment to the ground lease for the Whinstone facility, to add a second 100-acre tract of real property contiguous to the existing 100-acre tract on which the existing Whinstone Facility sits for an additional $0.9 million in annual payments. The initial term of the lease is scheduled to expire on January 31, 2032, 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.

17 
 

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited) 

 

The components of lease expense for the three and six months ended June 30, 2022 (in thousands):

   Three Months Ended June 30,   Six Months Ended June 30, 
   2022   2021   2022   2021 
Operating lease cost  $803   $109   $1,425   $109 
Variable lease cost(2)   31    
—  
    76    8 
Total rent expense  $834   $109   $1,501   $117 

 

(2)  Amounts primarily include common area maintenance and utility charges not included in the measurement of right of use assets and operating lease liabilities. 

Other Information

 

   Three Months Ended June 30,   Six Months Ended June 30, 
    2022    2021    2022    2021 
Operating cash flows from operating leases  $719   $140   $719   $140 
Right of use assets exchanged for new operating lease liabilities  $
—  
   $8,387   $8,784   $8,387 
Weighted-average remaining lease term – operating leases   9.3    7.2    9.3    7.2 
Weighted-average discount rate – operating leases   6.5%   7.5%   6.5%   7.5%

 

The following table represents our future minimum operating lease payments as of, and subsequent to, June 30, 2022 under ASC 842 (in thousands):

    Ground lease   Office and other leases   Total 
 Six months ending December 31, 2022   $942   $490   $1,432 
 2023    1,935    1,013    2,948 
 2024    1,993    1,001    2,994 
 2025    2,053    908    2,961 
 2026    2,114    822    2,936 
 2027    2,178    839    3,017 
 Thereafter    9,664    6,030    15,694 
 Total undiscounted lease payments    20,879    11,103    31,982 
 Less present value discount    (6,280)   (4,216)   (10,496)
 Present value of lease liabilities   $14,599   $6,887   $21,486 

 

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 six months ended June 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 three and six months ended June 30, 2022, in connection with the At-the-Market Sales Agreement between the Company and its Sales Agent, the Company received gross proceeds of approximately $272.7 million ($267.0 million net of $5.7 million in expenses) from the sale of 30,559,817 shares of common stock, with an average fair value of $8.92 per share.

 

 

18 
 

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited) 

 

Common Stock: 

 

During the six months ended June 30, 2022, the Company granted 863,805 service-based restricted stock units with a fair value of approximately $7.9 million and 715,300 performance-based restricted stock units with a fair value of approximately $11.5 million.

 

During the six months ended June 30, 2022, 1,162,080 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 486,395 of these shares at a fair value of approximately $8.8 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 (“RSUs”) and Warrants” to these unaudited Notes to Condensed Consolidated Financial Statements.

Note 14. Restricted Common Stock, Stock Options, Restricted Stock Units (“RSUs”) and Warrants

Stock-Based Compensation:

 

The Company’s stock-based compensation expenses recognized during the three and six months ended June 30, 2022 and 2021 were attributable to selling, general and administrative expenses, which are included in the accompanying unaudited condensed consolidated statements of operations.

The Company recognized stock-based compensation expense during the three and six months ended June 30, 2022 and 2021 as follows:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
    2022    2021    2022    2021 
Service-based restricted stock awards  $2,656   $970   $3,938   $1,905 
Performance-based restricted stock awards   (1,955)   
—  
    (195)   
—  
 
    Total stock-based compensation  $701   $970   $3,743   $1,905 

Restricted Common Stock Awards:

Performance-based RSUs

A summary of the Company’s unvested performance-based restricted stock units for the six months ended June 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    715,300   $16.08 
Vested    (568,860)  $36.21 
Forfeited    (80,033)  $33.75 
Unvested at June 30, 2022    3,470,992   $32.58 

 

19 
 

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited) 

 

During the six months ended June 30, 2022, the Company awarded 715,300 performance-based restricted shares of common stock under the 2019 Equity Plan to employees, which are eligible to vest upon the successful completion of specified milestones related to added infrastructure capacity and financial targets over the performance period ending on December 31, 2023.

The value of performance-based restricted stock grants is measured based on their fair market value on the date of grant and amortized over their respective estimated implicit service periods. As of June 30, 2022, there was approximately $25.9 million of total unrecognized compensation cost related to performance-based restricted stock awards, which is expected to be recognized over a remaining weighted-average vesting period of approximately nine months.

Service-based RSUs

A summary of the Company’s unvested service-based restricted stock units for the six months ended June 30, 2022 is presented here:

    Number of Shares   Weighted Average Grant-Date
 Fair Value
 
Unvested at January 1, 2022    610,561   $5.93 
Vested    (691,909)  $6.39 
Granted    863,805   $9.20 
Forfeited    (8,915)  $11.49 
Unvested at June 30, 2022    773,542   $9.11 

The value of service-based restricted stock grants is measured based on their fair market value on the date of grant and amortized over their respective vesting periods. During the six months ended June 30, 2022, the fair value of awards granted totaled $7.9 million and as of June 30, 2022, there was approximately $6.2 million of total unrecognized compensation cost related to unvested service-based restricted common stock rights, which is expected to be recognized over a remaining weighted-average vesting period of approximately eleven months.

Other Common Stock Purchase Warrants:

As of June 30, 2022, the Company had a warrant outstanding to purchase up to 63,000 shares of the Company’s common stock at a purchase price of $48.37 per share issued to XMS Capital Partners, LLC (“XMS”) as partial payment for its advisory services in connection with the Company’s Whinstone Acquisition. The warrant can be exercised any time through August 12, 2026.

 

No warrants were issued during the six months ended June 30, 2022.

 

20 
 

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited) 

Note 15. Fair Value Measurements

Assets and liabilities measured at fair value on a recurring basis:

The Company’s assets and liabilities measured at fair value on a recurring basis consisted of the following as of June 30, 2022, and December 31, 2021:

   Fair value measured at June 30, 2022 
   Total carrying value at June 30, 2022   Quoted prices in active markets
 (Level 1)
   Significant other observable inputs (Level 2)   Significant unobservable inputs (Level 3) 
Derivative asset  $130,693   $
—  
   $
—  
   $130,693 
Contingent consideration liability  $54,477   $
—  
   $
—  
   $54,477 

 

 

   Fair value measured at December 31, 2021 
   Total carrying value at December 31, 2021   Quoted prices in active markets
 (Level 1)
   Significant other observable inputs (Level 2)   Significant unobservable inputs (Level 3) 
Derivative asset  $26,079   $
—  
   $
—  
   $26,079 
Contingent consideration liability  $83,928   $
—  
   $
—  
   $83,928 

Level 3 Assets: 

Power Supply Agreement

During the year ended December 31, 2021, the Company recorded a derivative asset related to its Power Supply Agreement with TXU Energy Retail Company LLC (“TXU”), the energy supplier to the Company’s Whinstone Facility (the “Power Supply Agreement”). The Power Supply Agreement was classified as a derivative asset and measured at fair value on the date of the Company’s acquisition of Whinstone, with changes in fair value recognized in change in fair value of derivative asset in operating income or loss on the accompanying unaudited condensed consolidated statements of operations. The contract was not designated as a hedging instrument. Prior to the Whinstone Acquisition, the Company did not have any derivative contracts. The estimated fair value of the Company’s derivate asset is classified in Level 3 of the fair value hierarchy due to the significant unobservable inputs utilized in the valuation. Specifically, our discounted cash flow estimation models contain quoted commodity exchange spot and forward prices and are adjusted for basis spreads for load zone-to-hub differentials through the term of the Power Supply Agreement, which ends in April 2030. The discount rate utilized of approximately 21% includes observable market inputs, but also includes unobservable inputs based on qualitative judgment related to company-specific risk factors.

The terms of the Power Supply Agreement require margin-based collateral 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 June 30, 2022 and December 31, 2021.

 

21 
 

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited) 

 

Level 3 Liabilities: 

Business Combination Contingent Consideration

 

The Company recorded a Level 3 financial liability during the year ended December 31, 2021, relating to the contingent consideration arrangement arising from the acquisition of Whinstone. Contingent consideration represents an obligation of the Company to transfer cash to 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 six months ended June 30, 2022 and 2021:

 

  2022  

2021

 
Balance as of January 1  $26,079   $
—  
 
   Acquisition of Whinstone   
—  
    13,967 
Change in fair value   104,614    16,393 
Balance as of June 30  $130,693   $30,360 

For the three and six months ended June 30, 2022, there was a change of approximately $60.9 million and $104.6 million, respectively, in Level 3 assets measured at fair value. Additionally, during the three and six months ended June 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 $5.7 million and $8.3 million, respectively, which are recorded in power curtailment credits in the accompanying unaudited condensed consolidated statements of operations. During the three and six months ended June 30, 2021, power curtailment credits totaled $1.1 million in each period.

22 
 

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 six months ended June 30, 2022 and 2021:

   2022   2021 
Balance as of January 1  $83,928   $
—  
 
   Acquisition of Whinstone   
 
    82,953 
Change in contingent consideration   (29,627)   
—  
 
Change in fair value   176    185 
Balance as of June 30  $54,477   $83,138 

 

For the three and six months ended June 30, 2022 and 2021, the change in Level 3 liabilities measured at fair value was $0.2 million for each period. 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 Level 1, Level 2 and Level 3 during the periods presented.

Note 16. Commitments and Contingencies

Commitments:

Operating Leases:

The Company leases its primary office locations, manufacturing facilities and 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 Whinstone Facility. During the six months ended June 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.

 

23 
 

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited) 

 

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.

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 a Colocation Services Agreement 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 compensatory damages in excess of $50 million, and pre-judgment and post-judgment interest. Whinstone is preparing to respond to the Complaint, which is due August 22, 2022. Whinstone denies the substantive allegations of the Complaint, intends to vigorously defend Whinstone against GMO’s claims, and intends to assert a Counterclaim 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 will be 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.

24 
 

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited) 

 

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.

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 six months ended June 30, 2022 and 2021. However, three customers accounted for nearly all of the Company’s third-party Data Center Hosting revenue.

25 
 

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited) 

 

For the three months ended June 30, 2022, approximately 67% of the Company’s mining revenue was generated from our Whinstone Facility in Rockdale, Texas, and the remaining 33% was generated from the Coinmint Facility. For the six months ended June 30, 2022, approximately 62% of the Company’s mining revenue was generated from our Whinstone Facility in Rockdale, Texas, and the remaining 38% was generated from the Coinmint Facility in New York. During the six months ended June 30, 2022, the Company terminated its agreement with Coinmint effective July 8, 2022.

The following table details revenue and cost of revenues for the Company’s reportable segments for the three and six months ended June 30, 2022 and 2021, and reconciles to net income (loss) on the unaudited condensed consolidated statements of operations:

   Three Months Ended June 30,   Six Months Ended June 30, 
   2022   2021   2022   2021 
Reportable segment revenue, net:                    
Mining  $46,151   $31,450   $104,096   $54,623 
Data Center Hosting   23,577    2,874    44,616    2,874 
Engineering   19,512    
—  
    34,750    
—  
 
Other revenue   24    24    48    48 
Eliminations   (16,317)   
—  
    (30,776)   —   
Total segment and consolidated revenue   72,947    34,348    152,734    57,545 
Reportable segment cost of revenues (exclusive of depreciation and amortization shown below):                    
Mining   20,913    9,325    44,844    16,859 
Data Center Hosting   26,012    3,736    47,504    3,736 
Engineering   16,983    
—  
    30,535    
—  
 
Eliminations   (15,554)   
—  
    (28,901)   
—  
 
Total segment and consolidated cost of revenues (exclusive of depreciation and amortization shown below)   48,354    13,061    93,982    20,595 
Reconciling Items:                    
Acquisition-related costs   
—  
    (17,032)   (78)   (18,342)
Selling, general and administrative   (10,713)   (3,512)   (21,545)   (7,664)
Depreciation and amortization   (20,562)   (5,738)   (34,807)   (8,584)
Change in fair value of derivative asset   60,931    16,393    104,614    16,393 
Power curtailment credits   5,706    1,143    8,258    1,143 
Change in fair value of contingent consideration   
—  
    (185)   (176)   (185)
Realized gain on sale/exchange of cryptocurrencies   14,353    29    23,589    29 
Gain on exchange of equipment   8,614    
—  
    8,614    
—  
 
Impairment of cryptocurrencies   (99,787)   (17,507)   (126,177)   (17,507)
Impairment of goodwill   (349,148)   
—  
    (349,148)   
—  
 
Interest income (expense)   
—  
    80    (357)   255 
Realized loss on sale of marketable equity securities   (1,624)   
—  
    (1,624)   
—  
 
Realized gain on sale/exchange of long-term investment   
—  
    26,260    
—  
    26,260 
Unrealized gain (loss) on marketable equity securities   (4,837)   339    (6,448)   339 
Other income (expense)   (59)   1,510    (59)   1,510 
Current income tax benefit (expense)   (427)   
—  
    (739)   
—  
 
Deferred income tax benefit (expense)   6,626    (3,730)   6,626    (3,730)
Net income (loss)  $(366,334)  $19,337   $(330,705)  $26,867 

 

 

26 
 

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited) 

Note 18. Subsequent Events

Sale of Common Stock:

Subsequent to June 30, 2022, and as of the date of this filing, the Company received net proceeds on sales of 6.5 million shares of common stock under the Sales Agreement of approximately $31.5 million (after deducting $0.6 million in commissions and expenses) at a weighted average price of $4.95 per share.

Sale of Bitcoin:

Subsequent to June 30, 2022, the Company sold 275 Bitcoin at an average sales price of approximately $20,262 for proceeds of approximately $5.6 million and an estimated gain on sale of $0.4 million.

Employee Equity Grants:

Subsequent to June 30, 2022, the Company granted 729,349 restricted stock units under the 2019 Equity Plan, including: (a) 38,350 service-based RSUs with a fair value of approximately $0.2 million, which are 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)  690,999 performance-based RSUs with a fair value of approximately $3.2 million, which are eligible to vest based on the Company’s achievement of certain performance objectives, as specified under the performance-based restricted stock unit plan adopted on August 12, 2021 under the 2019 Equity Plan.

Subsequent to June 30, 2022, 79,607 shares of common stock were issued to the Company’s officers and employees in settlement of an equal number of fully vested restricted stock units awarded to such individuals by the Company pursuant to grants made under the Company’s 2019 Equity Plan. The Company withheld 22,423 of these shares at a fair value of approximately $0.1 million, in satisfaction of withholding taxes related to the settlement of these vested restricted stock units, as permitted by the 2019 Equity Plan and approved by the Compensation Committee of the Company’s Board of Directors.

Termination of Co-location Mining Services Agreement

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. See Note 8. “Property and Equipment” to these unaudited Notes to Condensed Consolidated Financial Statements for further discussion.

 

27 
 

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 Whinstone Facility, with 700 megawatts in total 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 capacity for both our Bitcoin mining operations and to host institutional-scale Bitcoin mining and data center clients. Our Whinstone Facility is believed to be the largest Bitcoin mining facility in North America, as measured by developed capacity, and we are currently expanding its capacity.

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 other 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 other 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 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 Whinstone 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 2022 will continue to be a year 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 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 six months ended June 30, 2022, we continued to deploy miners with the objective of increasing the Company’s operational efficiency and performance.

 

At June 30, 2022, our Mining business operated approximately 44,720 ASIC miners, with a hash rate capacity of approximately 4.4 exahash per second (“EH/s”). In the six months ended June 30, 2022, we mined 2,800 Bitcoin, which represented an increase of 58% over the 1,166 Bitcoin we mined in the six months ended June 30, 2021. Based on our existing operations and expected deliveries of miners pursuant to our purchase orders with their manufacturer, Bitmain, we anticipate we will have approximately 115,450 miners in operation, with a hash rate capacity of approximately 12.5 EH/s by the first quarter of 2023.

 

Subsequent to June 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 Whinstone Facility. See Note 8. “Property and Equipment” to these unaudited Notes to Condensed Consolidated Financial Statements for further discussion.

 

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.

 

 

28 
 

Miner Purchases and Deployments

 

At June 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 six months ended June 30, 2022   13,813 
Miners received during the six months ended June 30, 2022, but not yet deployed   14,369 
Miners under contract, but not yet received   56,361 
Total miners under contract, deployed or expected to be received, at June 30, 2022   115,450 

 

As of June 30, 2022, the Company had outstanding executed purchase agreements for the purchase of miners from Bitmain for a total of approximately 26,361 new model S19j Pro miners and 30,000 new model S19XP miners, scheduled to be delivered through December 2022. Pursuant to these agreements, approximately $110.6 million remains payable to Bitmain in installments in advance of shipment of the miners, subject to future adjustments as provided in the contracts, which is scheduled to occur monthly through December 2022.

In order to take advantage of our low-cost power supply agreement at the Company’s Whinstone Facility and eliminate third-party hosting fees, during the six months ended June 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 impacts of COVID-19 on global logistics discussed below. We are actively monitoring this situation and the possible effects on our financial condition, liquidity, operations, suppliers, and industry.

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 Whinstone Facility and the development of our new Corsicana Facility requires large quantities of construction materials, specialized electricity distribution equipment and other component parts that can be difficult to source. We have procured and hold many of the required materials to help mitigate against global supply logistic and pricing concerns. We continue to monitor developments in the global supply chain and assess their potential impact on 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.

 

29 
 

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 six months ended June 30, 2022, and 2021 ($ in thousands):

 

   Quantities     
   (in coins)   Amounts 
Balance at January 1, 2022   4,884   $159,544 
Revenue recognized from cryptocurrencies mined   2,800    104,096 
Proceeds from sale of cryptocurrencies   (1,000)   (33,116)
Exchange of Bitcoin for employee compensation   (31)   (1,362)
Realized gain on sale/exchange of cryptocurrencies   —      23,589 
Impairment of cryptocurrencies   —      (126,177)
Balance at June 30, 2022   6,653   $126,574 

 

   Quantities     
   (in coins)   Amounts 
Balance at January 1, 2021   1,078   $11,626 
Revenue recognized from cryptocurrencies mined   1,166    54,139 
Proceeds from sale of cryptocurrencies   —      —   
Exchange of Bitcoin for employee compensation   (1)   (33)
Realized gain on sale/exchange of cryptocurrencies   —      29 
Impairment of cryptocurrencies   —      (17,507)
Balance at June 30, 2021   2,243   $48,254 

 

Results of Operations Comparative Results for the Three Months Ended June 30, 2022 and 2021:

 

Revenue:

 

For the three months ended June 30, 2022 and 2021, Mining revenue was $46.2 million, and $31.5 million, respectively. The increase of $14.7 million in Mining revenue was due to a higher number of Bitcoin mined of 1,395 in the 2022 period, as compared to 675 in the 2021 period, partially offset by lower Bitcoin values in the 2022 period, averaging $33,081 per coin as compared to $46,226 per coin in the 2021 period.

 

For the three months ended June 30, 2022 and 2021, Data Center Hosting revenue was $9.8 million, and $2.9 million, respectively. 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 Whinstone 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 June 30, 2022, Engineering revenue was $16.9 million, and there was no Engineering revenue for the three months ended June 30, 2021. 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 June 30, 2022 and 2021 was $18.0 million and $9.3 million, respectively, representing an increase of approximately $8.7 million. As a percentage of Mining revenue, cost of revenues totaled 39.0% and 29.7% for each of the three months ended June 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 $8.7 million in cost of revenues is primarily due to the increases in variable mining costs, including the variable hosting fees, associated with increases in mining revenues.

 

30 
 

Cost of revenues for Data Center Hosting for the three months ended June 30, 2022 and 2021 was $15.2 million and $3.7 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 June 30, 2022 was $15.2 million and there were no engineering costs for the three months ended June 30, 2021. The 2022 costs consisted primarily of direct materials and labor, as well as indirect manufacturing costs.

 

Selling, general and administrative expenses during the three months ended June 30, 2022 and 2021 totaled $10.7 million and $3.5 million, respectively. Selling, general and administrative expenses consist of stock-based compensation, legal and professional fees and other personnel and related costs. The increase of $7.2 million is primarily due to an increase of $2.1 million in compensation-related expense due to additional employees to support the Company’s growth, an increase in audit and consulting fees of $2.2 million resulting primarily from assistance on internal control systems and procedures and information technology projects, an increase in insurance expense of $0.8 million, and other general operating costs, including rent, to support the Company’s growth.

 

Depreciation and amortization expenses during the three months ended June 30, 2022 totaled $20.6 million, which is an increase of approximately $14.9 million, as compared to $5.7 million for the three months ended June 30, 2021. The increase is primarily due to higher depreciation expense recognized for the Whinstone Facility and our recently acquired miners.

 

Change in fair value of our derivative asset for the three months ended June 30, 2022 and 2021, was $60.9 million and $16.4 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 on the date of our acquisition of Whinstone.

 

Power curtailment credits for the three months ended June 30, 2022 and 2021, was $5.7 million and $1.1 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 cryptocurrencies for the three months ended June 30, 2022 was $14.4 million. The realized gain or loss on sale/exchange of cryptocurrencies for the three months ended June 30, 2021 was nominal.

 

Gain on exchange of equipment for the three months ended June 30, 2022 was $8.6 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 June 30, 2021.

 

Impairment of cryptocurrencies for the three months ended June 30, 2022 and 2021 was $99.8 million and $17.5 million, respectively, arising from the decline in Bitcoin prices.

 

Impairment of goodwill for the three months ended June 30, 2022 was $349.1 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 three months ended June 30, 2021.

 

Other income and expenses:

 

Other expense for the three months ended June 30, 2022 was $6.5 million, and primarily consisted of the unrealized loss on marketable equity securities of $4.8 million and the realized loss on sale of marketable equity securities of $1.6 million recognized in connection with the sale of our shares of Mogo. Other income for the three months ended June 30, 2021 was $28.2 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.

 

Results of Operations Comparative Results for the Six Months Ended June 30, 2022 and 2021:

 

Revenue:

 

For the six months ended June 30, 2022 and 2021, Mining revenue was $104.1 million, and $54.6 million, respectively. The increase of $49.5 million in Mining revenue was due to a higher number of Bitcoin mined of 2,800 in the 2022 period, as compared to 1,166 in the 2021 period, partially offset by lower Bitcoin values in the 2022 period, averaging $37,175 per coin as compared to $37,868 per coin in the 2021 period.

 

For the six months ended June 30, 2022 and 2021, Data Center Hosting revenue was $19.5 million, and $2.9 million, respectively. 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 Whinstone 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 six months ended June 30, 2022, Engineering revenue was $29.1 million, and there was no Engineering revenue for the six months ended June 30, 2021. 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.

 

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Costs and expenses:

 

Cost of revenues for Mining for the six months ended June 30, 2022 and 2021 was $37.1 million and $16.9 million, respectively, representing an increase of approximately $20.2 million. As a percentage of Mining revenue, cost of revenues totaled 35.6% and 30.9% for each of the six months ended June 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 $20.2 million in cost of revenues is primarily due to the increases in variable mining costs, including the variable hosting fees, associated with increases in mining revenues.

Cost of revenues for Data Center Hosting for the six months ended June 30, 2022 and 2021 was $30.2 million and $3.7 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 six months ended June 30, 2022 was $26.7 million and there were no Engineering costs for the six months ended June 30, 2021. The 2022 costs consisted primarily of direct materials and labor, as well as indirect manufacturing costs.

 

Selling, general and administrative expenses during the six months ended June 30, 2022 and 2021 totaled $21.5 million and $7.7 million, respectively. Selling, general and administrative expenses consist of stock-based compensation, legal and professional fees and other personnel and related costs. The increase of $13.9 million is primarily due to an increase of $5.0 million in compensation expense and an increase of $1.8 million in stock-compensation expense resulting from additional awards due to additional employees, an increase in audit and consulting fees of $2.4 million resulting primarily from assistance on internal control systems and procedures and information technology projects, an increase in insurance expense of $1.6 million, and other general operating costs, including rent, to support the Company’s growth.

 

Depreciation and amortization expenses during the six months ended June 30, 2022 totaled $34.8 million, which is an increase of approximately $26.2 million, as compared to $8.6 million for the six months ended June 30, 2021. The increase is primarily due to higher depreciation expense recognized for the Whinstone Facility and our recently acquired miners.

 

Change in fair value of our derivative asset for the six months ended June 30, 2022 and 2021 was $104.6 million and $16.4 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 on the date of our acquisition of Whinstone.

 

Power curtailment credits for the six months ended June 30, 2022 and 2021 was $8.3 million and $1.1 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 cryptocurrencies for the six months ended June 30, 2022 was $23.6 million. The realized gain or loss on sale/exchange of cryptocurrencies for the six months ended June 30, 2021 was nominal.

 

Gain on exchange of equipment for the six months ended June 30, 2022 was $8.6 million arising from the equipment exchange agreement with a third-party Bitcoin mining company. There was no gain on exchange of equipment during the six months ended June 30, 2021. 

 

Impairment of cryptocurrencies for the six months ended June 30, 2022 and 2021 was $126.2 million and $17.5 million, respectively, arising from the decline in Bitcoin prices.

 

Impairment of goodwill for the six months ended June 30, 2022 was $349.1 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 six months ended June 30, 2021.

 

Other income and expenses:

 

Other expense for the six months ended June 30, 2022 was $8.5. million and primarily consisted of the unrealized loss on marketable equity securities of $6.4 million and the realized loss on sale of marketable equity securities of $1.6 million recognized in connection with the sale of our shares of Mogo. Other income for the six months ended June 30, 2021 was $28.4 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 for shares of Mogo.

 

 

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Non-GAAP Measures

 

In addition to consolidated U.S. GAAP financial measures, we consistently evaluate our use 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 cryptocurrencies 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 cryptocurrencies 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 June 30,   Six Months Ended June 30, 
(in thousands)  2022   2021   2022   2021 
                 
Net income (loss)  $(366,334)  $19,337   $(330,705)  $26,867 
Interest (income) expense   —      (80)   357    (255)
Income tax expense (benefit)   (6,199)   3,730    (5,887)   3,730 
Depreciation and amortization   20,562    5,738    34,807    8,584 
EBITDA   (351,971)   28,725    (301,428)   38,926 
                     
Adjustments:                    
Non-cash/non-recurring operating expense:                    
Stock-based compensation expense   701    970    3,743    1,905 
Acquisition-related costs   —      17,032    78    18,342 
Change in fair value of derivative asset   (60,931)   (16,393)   (104,614)   (16,393)
Change in fair value of contingent consideration   —      185    176    185 
Realized loss on sale of marketable equity securities   1,624    —      1,624    —   
Unrealized loss (gain) on marketable equity securities   4,837    (339)   6,448    (339)
Realized gain on sale/exchange of long-term investment   —      (26,260)   —      (26,260)
Gain on exchange of equipment   (8,614)   —      (8,614)   —   
Other (income) expense   59    (1,510)   59    (1,510)
Impairment of goodwill   349,148    —      349,148    —   
Other revenue, (income) expense items:                    
License fees   (24)   (24)   (48)   (48)
Adjusted EBITDA  $(65,170)  $2,386   $(53,428)  $14,808 

   

 

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Non-GAAP Adjusted EPS  Three Months Ended June 30,   Six Months Ended June 30, 
   2022   2021   2022   2021 
                 
Net income (loss)  $(2.81)  $0.22   $(2.67)  $0.31 
Interest (income) expense   —      —      —      —   
Income tax expense (benefit)   (0.05)   0.04    (0.05)   0.04 
Depreciation and amortization   0.16    0.06    0.28    0.10 
EBITDA   (2.70)   0.32    (2.44)   0.45 
                     
Adjustments:                    
Non-cash/non-recurring operating expense:                    
Stock-based compensation expense   0.01    0.01    0.03    0.02 
Acquisition-related costs   —      0.19    —      0.21 
Change in fair value of derivative asset   (0.47)   (0.18)   (0.85)   (0.19)
Change in fair value of contingent consideration   —      —      —      —   
Realized loss on sale of marketable equity securities   0.01    —      0.01    —   
Unrealized loss (gain) on marketable equity securities   0.04    —      0.05    —   
Realized gain on sale/exchange of long-term investment   —      (0.29)   —      (0.30)
Gain on exchange of equipment   (0.07)   —      (0.07)   —   
Other (income) expense   —      (0.02)   —      (0.02)
Impairment of goodwill   2.68    —      2.82    —   
Other revenue, (income) expense items:                    
License fees   —      —      —      —   
Adjusted EPS  $(0.50)  $0.03   $(0.43)  $0.17 
                     
Diluted weighted average number of shares outstanding   130,405,502    89,241,044    123,760,839    86,501,471 

 

In addition to the non-GAAP financial measures of Adjusted EBITDA and Adjusted EPS described above, we believe “Cost of revenues – Mining, net of power curtailment credits” and “Cost of revenues – Data Center Hosting, net of power curtailment credits” are two additional performance measurements that represent a key indicator of the Company’s core business operations of both Bitcoin mining and Data Center Hosting. These measurements are defined as Cost of revenues – Mining less power curtailment credits and Cost of revenues – Data Center Hosting less power curtailment credits, respectively.

 

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.

 

 

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“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 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 June 30,   Six Months Ended June 30, 
   2022   2021   2022   2021 
Cost of revenues – Data Center Hosting  $15,184   $3,736   $30,169   $3,736 
Power curtailment credits   (3,497)   (1,143)   (5,438)   (1,143)
Cost of revenues – Data Center Hosting, net of power curtailment credits  $11,687   $2,593   $24,731   $2,593 
                     
Cost of revenues – Mining  $17,995   $9,325   $37,089   $16,859 
Power curtailment credits   (2,209)   —      (2,820)   —   
Cost of revenues – Mining, net of power curtailment credits  $15,786   $9,325   $34,269   $16,859 
                     
Total power curtailment credits  $(5,706)  $(1,143)  $(8,258)  $(1,143)

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

At June 30, 2022, we had working capital of approximately $395.9 million, which included cash and cash equivalents of $270.5 million. We reported net loss of $330.7 million during the six months ended June 30, 2022. Net loss included $277.4 million in non-cash items consisting primarily of the change in fair value of our derivative asset of $104.6 million, the increase in Bitcoin held of $102.7 million, a realized gain on the sale/exchange of cryptocurrencies of $23.6 million, the gain on exchange of equipment of $8.6 million, and income tax benefit of $5.9 million offset by the impairment of goodwill of $349.1 million, impairment of cryptocurrencies of $126.2 million, depreciation and amortization of $34.8 million, an unrealized loss on marketable equity securities of $6.4 million, stock-based compensation expense of $3.7 million and the realized loss on sale of marketable equity securities of $1.6 million.

Contractual Commitments

At June 30, 2022, we had the following contractual commitments (in thousands):

Agreement Date (3)   Original Purchase Commitment     Open Purchase Commitment     Deposit Balance     Expected Shipping
April 5, 2021   $ 138,506     $ 17,068     $ 85,095     Third Quarter 2022 – Fourth Quarter 2022
October 29, 2021   $ 56,250     $ 10,800     $ 41,864     Third Quarter 2022 – Fourth Quarter 2022
November 22, 2021   $ 32,550     $ 8,085     $ 21,402     Third Quarter 2022 – Fourth Quarter 2022
December 10, 2021   $ 97,650     $ 24,255     $ 68,124     Third Quarter 2022 – Fourth Quarter 2022
December 24, 2021   $ 202,860     $ 50,400     $ 140,868     Third Quarter 2022 – Fourth Quarter 2022
Total   $ 527,816     $ 110,608     $ 357,353      

(3) 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 Riot’s miners deployed at the Coinmint Facility. In exchange, Coinmint is reimbursed for direct production expenses and receives a performance fee based on the net cryptocurrencies generated by Riot’s miners deployed at the Coinmint Facility. The amount of electrical power supplied to Riot’s miners at the Coinmint Facility was subsequently increased to accommodate Riot’s expanding miner fleet. During the six months ended June 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.

 

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Miners

As of June 30, 2022, the Company had outstanding executed purchase agreements for the purchase of miners from Bitmain for a total of approximately 26,361 new model S19j Pro miners and 30,000 new model S19XP miners, scheduled to be delivered through December 2022. Pursuant to these agreements, approximately $110.6 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.

 

Corsicana Facility Land Site:

During the six months ended June 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 operations commencing 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 June 30, 2022, the Company has incurred costs of approximately $10.1 million related to the development of the Corsicana Facility. The Company expects to incur costs of approximately $89.4 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 significantly reduce our current rate of spending or explore other strategic alternatives.

 

 

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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 June 30, 2022, the Company had received net proceeds on sales of 30.6 million shares of common stock under the Sales Agreement of approximately $267.0 million (after deducting $5.7 million in commissions and expenses) at a weighted average price of $8.92.

Legal Proceedings

The Company has been named a defendant in several 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 with construction in progress as of June 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, shareholders, 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), who is part of the management team at Whinstone and who is considered a related party of Whinstone. The Company is evaluating certain related party implications of the initiative, under U.S. GAAP and other applicable regulatory reporting requirements such as 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, TX 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 six months ended June 30, 2022, a total of $0.6 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 period from the Whinstone acquisition to June 30, 2021, a total of $0.1 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 being 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 $14.4 million during the six months ended June 30, 2022. Cash was used in operations by net loss of $330.7 million, less non-cash items of $277.4 million in non-cash items consisting primarily of the change in fair value of our derivative asset of $104.6 million, the increase in Bitcoin held of $102.7 million, a realized gain on the sale/exchange of cryptocurrencies of $23.6 million, the gain on exchange of equipment of $8.6 million, and income tax benefit of $5.9 million, offset by the impairment of goodwill of $349.1 million, impairment of cryptocurrencies of $126.2 million, depreciation and amortization of $34.8 million, an unrealized loss on marketable equity securities of $6.4 million, stock-based compensation expense of $3.7 million, the realized loss on sale of marketable equity securities of $1.6 million, and the amortization of our right of use asset of $0.8 million. The change in assets and liabilities of $38.9 million consisted primarily of proceeds from sale of cryptocurrencies of $33.1 million, change in fair value of future power credits of $29.5 million, and an increase in billings in excess of costs and estimated earnings of $1.1 million, partially offset by decreased accounts payable and accrued expenses of $14.6 million, increased prepaid expenses and other current assets of $5.9 million, increased costs and estimated earnings in excess of billings of $3.9 million, decreased deferred revenue of $1.1 million, increased accounts receivable of $0.7 million, and increased lease liability of $0.7 million, increased customer deposits of $2.0 million.

 

 

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Net cash used in operating activities was $27.2 million during the six months ended June 30, 2021. Cash was generated from operations by income of $26.9 million, less non-cash items of $65.4 million, consisting primarily of increased cryptocurrencies of $54.1 million, a realized gain on the sale of marketable equity securities of $26.3 million and the change in fair value of our derivative asset of $16.4 million, partially offset by impairment of our cryptocurrencies of $17.5 million, depreciation and amortization of $8.6 million, deferred income tax expense of $3.7 million, and stock-based compensation of $1.9 million, net of other immaterial items. The change in assets and liabilities of $11.4 million consisted primarily of increased accounts payable and accrued expenses of $17.4 million, increased customer deposits of $2.7 million, decreased prepaid expenses and other current assets of $2.4 million, decreased accounts receivable of $1.0 million, partially offset by decreased deferred revenue of $12.1 million.

Investing Activities

Net cash used in investing activities during the six months ended June 30, 2022 was $269.9 million, primarily consisting of deposits on equipment of $192.5 million, purchases of property and equipment of $77.4 million and cash paid for other deposits of $0.7 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 six months ended June 30, 2021 was $131.2 million, primarily consisting of deposits on equipment of $85.0 million, our acquisition of Whinstone of $40.9 million, net of cash acquired, and purchases of property and equipment of $7.1 million, partially offset by proceeds of $1.8 million received for our Mogo investment.

Financing Activities

Net cash provided by financing activities was $242.5 million during the six months ended June 30, 2022, which consisted of net proceeds from the issuance of our common stock in connection with our 2022 ATM Offering of $267.0 million, partially offset by the shares of common stock withheld to satisfy employee taxes of $8.8 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 $82.2 million during the six months ended June 30, 2021, which consisted of net proceeds from the issuance of our common stock in connection with our December 2020 ATM Offering of $82.7 million and proceeds received from the exercise of common stock warrants of $0.8 million, partially offset by the shares of common stock withheld to satisfy employee withholding taxes of $1.3 million in connection with the settlement of vested equity awards granted under our 2019 Equity Plan.

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.

 

 

38 
 

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. At June 30, 2022, we held 6,653 Bitcoin, with a carrying value of $126.6 million, all of which were produced from our Mining operations. The carrying value of our Bitcoin assets at June 30, 2022 reflects the $126.2 million of impairment charges we recorded against the carrying value of our Bitcoin assets during the six months ended June 30, 2022 due to decreases in the fair value of our Bitcoin assets after receipt.

As discussed under the heading “Cryptocurrencies” 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 the cryptocurrency 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 June 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 June 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) 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.

 

39 
 

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 (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 six months ended June 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 report on Form 10-Q for the three months ended March 31, 2022, as filed with the SEC on May 10, 2022. 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.

 

40 
 

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.  Certificate of Incorporation and Bylaws. 
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). 
10.  Material Contracts. 
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 furnished herewith Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * 
32.2*  Section 1350 Certification of Chief Financial Officer furnished herewith Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * 
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 June 30, 2022 and December 31, 2021 (Unaudited); (ii) the Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2022 and 2021 (Unaudited); (iii) the Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2022 and 2021 (Unaudited); (iv) the Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 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.

**   Certain marked portions of this exhibit have been omitted as confidential information.

  To be filed by a Current Report on Form 8-K and incorporated by reference herein.

††   Certain schedules and similar amendments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company undertakes to furnish supplement copies of any of the omitted schedules upon request by the SEC.

+   Indicates a management contract or compensatory plan or arrangement.

 

41 
 

 

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 August 15, 2022.

 

 

Riot Blockchain, Inc.

(Registrant)

   
Dated: August 15, 2022 /s/ Jason Les
  Jason Les
 

Chief Executive Officer

(Principal Executive Officer)

   
  /s/ Jeffrey G. McGonegal
  Jeffrey G. McGonegal
 

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

 

 

 

42 

 

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