UNITED STATES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A10-K
(Amendment no. 2)
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☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2023
OR
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| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from: to:
Commission file number: 001-33675
RIOT PLATFORMS, INC.
(Exact name of registrant as specified in its charter)
| 84-1553387 | |
(State or other jurisdiction of Incorporation or organization) | | (I.R.S. Employer Identification No.) |
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3855 Ambrosia Street, Suite 301, Castle Rock, CO | 80109 | |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code (303)794-2000
Securities registered under Section 12(b) of the Securities Exchange Act:
Securities registered under Section 12(b) of the Securities Exchange Act: | | | | |
Common Stock, no par value per share | RIOT | The Nasdaq Capital Market | ||
(Title of class) | | (Trading Symbol) | | (Name of each exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Securities Exchange Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act: Yes ☐ No ☒
Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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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 the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the shares of common stock, no par value, held by non-affiliates of the registrant as of June 30, 2021, the last business day of the registrant’s most recently completed second fiscal quarter,2023, was approximately $3.1$1.7 billion, based on the closing sale price per share of the registrant’s common stock as reported by the Nasdaq Capital Market on such date.
As of March 8, 2022,February 20, 2024, the registrant had 117,273,760253,538,213 shares of its common stock, no par value per share, outstanding, which was the only class of its registered securities outstanding as of that date.
DOCUMENTS INCORPORATED BY REFERENCE
None.
RIOT BLOCKCHAIN, INC.
ANNUAL REPORT ON FORM 10-K/A
EXPLANATORY NOTE
On March 16, 2022, Riot Blockchain, Inc. (“Riot Blockchain,” “Riot,”Portions of the “Company,” “we,” “us,” “our,” orregistrant’s definitive proxy statement for the “Registrant”) filed its2024 Annual Meeting of Stockholders are incorporated by reference in Part III of this Annual Report on Form 10-K, forto the extent indicated. Such definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the close of the registrant’s fiscal year ended December 31, 2021 (the “Original Form 10-K”) with the U.S. Securities and Exchange Commission (the “SEC”) and filed Amendment No. 1 (“Amendment No. 1”) to the Original Form 10-K on May 2, 2022 to include certain disclosures under Part III, Items 10, 11, 12, 13 and 142023.
Table of Form 10-K in reliance on General Instruction G(3) to Form 10-K.Contents
We are filing this Amendment to the Original Form 10-K (this “Amendment No. 2”) to correct an error in the content of Marcum LLP’s (“Marcum”) Report Of Independent Registered Public Accounting Firm On Internal Control Over Financial Reporting (the “ICFR Opinion”). The ICFR Opinion in the Original Form 10-K inadvertently omitted an explanatory paragraph which should have described the exclusion of Whinstone US, Inc. and Ferrie Franzmann Industries, LLC (d/b/a ESS Metron) from Marcum’s audit of internal control over financial reporting. An ICFR Opinion with the explanatory paragraph is included in this Amendment No. 2.
Additionally, the Company’s Quarterly Report for the three and nine months ended September 30, 2022, on Form 10-Q filed on November 7, 2022, revised amounts presented within the Original Form 10-K for an error that was considered immaterial to all prior annual and interim financial statements. This Amendment No.2 has been updated to reflect all revised amounts presented herein, is more fully described in Note 3 of the notes to the consolidated financial statements included herein.
Except as described above, this Amendment No. 2 does not otherwise change or update any of the disclosures set forth in the Original Form 10-K, and, except as expressly stated herein, does not reflect events occurring after the filing of the Original Form 10-K. This Amendment No. 2 modifies and amends the Original Form 10-K and should be read in conjunction with the Original Form 10-K and Amendment No. 1. References to “this Annual Report” contained in this Amendment No. 2 refer to the Original Form 10-K, as modified and amended by Amendment No. 1 and this Amendment No. 2. Capitalized terms not otherwise defined in this Amendment No. 2 have the meanings given to them in the Original Form 10-K.
RIOT BLOCKCHAIN,PLATFORMS, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K/A10-K
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RIOT BLOCKCHAIN,PLATFORMS, INC.
As used in this Annual Report on Form 10-K/A10-K for the fiscal year ended December 31, 20212023 (this “Annual Report”), the terms “we,” “us,” “our,” the “Company,” the “Registrant,” “Riot Blockchain,Platforms,” and “Riot” mean Riot Blockchain,Platforms, Inc., a Nevada corporation, and its consolidated subsidiaries, unless otherwise indicated.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 (the “PSLRA”). The Company may also make forward-looking statements in the other reports and documents filed with the United States Securities and Exchange Commission (the “SEC”), including those documents and filings incorporated herein by reference. All statements in this Annual Report and the documents incorporated by reference herein, contain forward-looking statements that involve risks and uncertainties, as well as assumptions 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 other than statements of historical fact, are forward-looking statements,“forward-looking statements” within the scope of this cautionary note and the PSLRA, including, but not limited to, 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;developments; future economic conditions, performance, or outlook;outlooks; future political conditions; the outcome of contingencies; potential acquisitions or divestitures; the number and value of Bitcoin rewards and transaction fees we earn from our Bitcoin 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 assumptions underlying or based upon any of the foregoing. 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”“projects,” and similar words or expressions. You should not place undue reliance on theseexpressions; however, forward-looking statements whichmay be made without such terminology.
Such forward-looking statements reflect our management’s opinions, onlyexpectations, beliefs, and assumptions regarding future events as of the date the statementstime they are made, andbased on information then available to management. These forward-looking statements are not guarantees of future performance or actual results. Forward-lookingresults, and you should not place undue reliance on them. The future events, conditions, or results expressed in, or implied by, such forward-looking statements may not materialize or prove to be correct due to various risks and uncertainties facing the Company, including those risks which management has identified and believes to be material, as well as those which management has not identified, or which management does not believe to be material as of the date hereof. Such identified risk factors are described in greater detail under the heading “Risk Factors” in Item 1A of Part I of this Annual Report, as well as under similar headings in subsequent filings we make with the SEC. The discussion of such risks is not an indication that any such risks have occurred at the time of this filing. It is not possible for our management to predict all risks, the potential impact of all factors on our business, or the extent to which any factor, or combination of factors, may cause our actual results to differ, perhaps materially, from those contained in, or implied by, any forward-looking statements we may make. Should such risks or uncertainties develop into actual events, these developments could have a material adverse effect on our business, financial condition, results of operations, stockholder’s equity, and cash flows, and the market price of our securities may decline, as a result.
Accordingly, you should read this Annual Report, and the other filings we make with the SEC, completely and with the understanding that our future results may be materially different from our historical results and from the results expressed in, or implied by, the forward-looking statements contained in this Annual Report and the documents incorporated by reference herein. All forward-looking statements attributable to us speak only as of the date they are made and, unless otherwise required by applicable securities laws, we do not assume any obligation and disclaim any intention to update or revise any such forward-looking statements. All forward-looking statements attributable to us are expressly qualified by the foregoing cautionary statements and are made in reliance onof 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.
The following are some of the risks, factors, and uncertainties we believe could cause our actual results to differ materially from our historical results or our current expectations or projections expressed in such forward-looking statements:
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 in this Annual Report can be found under Part I, Item 1A. “Risk Factors” beginning on page 13 of this Annual Report and under Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 32 of this Annual Report, which may be updated, supplemented, and amended by our subsequent disclosures contained in the reports and other filings we make with the Securities and Exchange Commission (the “SEC”).
The risks, factors and uncertainties disclosed herein and in our other filings are not exhaustive. Additional risks and uncertainties not known to us or that we currently believe not to be material as of the date hereof may adversely impact our business, financial condition, results of operations and cash flows. It is not possible for our management to accurately and completely predict all risks, factors, and uncertainties that may be applicable to our business, nor can we know the extent of the impact of such risks, factors, and uncertainties on our business. Should any of the risks, factors, or uncertainties we discuss in this Annual Report or the documents incorporated by reference herein, or any of those risks, factors, and uncertainties which we do not foresee or which we do not believe to be material as of the date hereof occur, our actual results to differ materially from those expressed in any forward-looking statements we may make, and they could have a material adverse effect on our business, results of operations, and financial condition.
The forward-looking statements made in this Annual Report speak only as of the date on which they are made. We undertake no obligation to update any forward-looking statements made in this Annual Report to reflect events or circumstances after the date of this Annual Report or to reflect new information, actual results, revised expectations, or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations expressed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.PSLRA.
Industry and Market Data
Information regarding market and industry statistics containedreferenced in or incorporated into this Annual Report has been obtained from industry and other publications that we believe to be reliable, but that are not produced for the purposes of securities filings. We have not independently verified any market, industry, or similar data presented or referenced in this Annual Report, and we cannot assure you of itsthe accuracy or completeness.completeness of such data. Further, we have not reviewed or included data from all sources. Forecasts and other forward-looking information obtained from third-party sources are subject to the same qualifications and the additional uncertainties discussed above in this cautionary note accompanying any of our forward-looking statements regarding estimates of future market size, revenue, and market acceptance of products and services. As a result, investors should not place undue reliance on any such forecasts and other forward-looking information.
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PART I
ITEM 1. BUSINESS
General
We are a vertically integrated Bitcoin mining company principally engaged in enhancing our capabilities to mine Bitcoin.Bitcoin in support of the Bitcoin blockchain. We also provide thecomprehensive and critical mining infrastructure for our institutional scale clients to mineinstitutional-scale Bitcoin mining at our large-scale Bitcoin mining facilityfacilities in Rockdale, Texas (the “Whinstone“Rockdale Facility”) and Navarro County, Texas (the “Corsicana Facility”). Our WhinstoneRockdale Facility is believed to be the largest single Bitcoin mining facility in North America, as measured by developed capacity, in North America.and we are currently evaluating further growing its capacity. Additionally, we are developing the Corsicana Facility, our second large-scale Bitcoin mining facility, which, upon completion, is expected to have approximately one gigawatt of Bitcoin mining capacity.
We operate in an environment and industry which is consistently evolvingfrequently evolves based on the proliferation and uptake of Bitcoin and cryptocurrencies in general.Bitcoin. A significant component of our strategy is to effectively and efficiently allocate capital betweenamong opportunities that we believe will generate the highest return on our capital.investment.
We operate in three reportable business segments: (1) Bitcoin Mining, (“Mining”), (2) Data Center Hosting, (“Hosting”), and (3) Electrical Products and Engineering, (“Engineering”).which are organized based on purpose and services performed. Each of our business segments is further discussed herein.
Amounts in this Annual Report are stated in thousands of U.S. Dollars except for share and per share amounts, numbers of miners, hash rate, and Bitcoin quantities and prices, or as otherwise noted.
Business Segments
Bitcoin Mining
AtAs of December 31, 2021,2023, our Bitcoin Mining business segment operated approximately 30,907112,944 miners with a total hash rate capacity of 3.112.4 exahash per second (“EH/s”), utilizing approximately 96 megawatts (“MW”) of capacity.. In 2021,2023, we mined 3,8136,626 Bitcoin, which represented an increase of 269%19.3% over the 1,0335,554 Bitcoin we mined in 2020.2022. Based on our existing operations and expected deliveries and deployment of miners we have purchased, we anticipate having approximately 120,150 miners28 EH/s of total hash rate in operation utilizing approximately 370 MW of capacity by the end of 2022.2024.
Our Bitcoin Mining operations are focused on maximizing our ability to successfully mine Bitcoin by growing our hash rate (the amount of computer power we devote to supporting the Bitcoin blockchain), to increase our chances of successfully verifying transactions to be recorded in the decentralized digital ledger comprisingcreating new blocks on the Bitcoin blockchain (a process known as “solving a block”). Generally, the greater share of the Bitcoin blockchain’s total network hash rate (the aggregate hash rate deployed to solving a block on the Bitcoin blockchain) represented by a miner’s hash rate represents, the greater thethat miner’s chances of solving a block and, therefore, earning the block reward, which is currently 6.25 Bitcoin rewards.plus transaction fees per block (subject to periodic halving, as discussed below). As the proliferation of Bitcoin continues and the market price for Bitcoin increases, we expect additional miner operators have enteredto enter the market in response to an increased demand for Bitcoin which we anticipate to follow increased Bitcoin prices. As these new miner operators enter the market and as increasingly powerful miners are deployed in an attempt to solve a block, the Bitcoin blockchain’s network hash rate has grown. Wegrows, meaning an existing miner must increase its hash rate at pace commensurate with the growth of network hash rate to maintain its relative chance of solving a block and earning a block reward. As we expect this trend to continue, so we expect towill need to continue to growgrowing our hash rate to compete in our dynamic and highly competitive industry.
We plan
A key component of the Bitcoin Mining business segment is to achieve this growth by acquiringacquire highly specialized computer servers (known in the industry as “miners”) built to, which operate application-specific integrated circuit (“ASIC”) chips designed specifically to mine Bitcoin, and deploying themdeploy such miners at-scale in our WhinstoneRockdale Facility including inand Corsicana Facility, that utilize innovative and efficient immersion-cooled environments. The WhinstoneRockdale Facility has aand the Corsicana Facility, which are supported by our dedicated best-in-class team, that supportsenable our mininglarge-scale Bitcoin Mining operations and provides us withprovide the necessary infrastructure and available power capacity for us to further scalecontinue scaling our Bitcoin Mining business in the future.business. We believe ASIC miners are the most effective and energy-efficient miners available today, and we believe deploying them at-scale, including in quiet immersion-cooled environments, with itstheir more efficient heat dissipation and reduced wear-and-tear versuscompared to traditional air-cooled hardware, will enable us to growcontinue growing our hash rate and optimize the output and longevity of our miners once they are deployed.
During the year ended December 31, 2021,2023, we entered into a long-term master purchase and sales agreement, dated as of June 23, 2023, as amended (the “Master Agreement”) with MicroBT Electronics Technology Co., LTD, through its manufacturing affiliate,
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SuperAcme Technology (Hong Kong) Limited (collectively, “MicroBT”) to secure the long-term supply of state-of-the-art immersion miners from MicroBT, all of which are being manufactured in the United States. Pursuant to the Master Agreement, MicroBT agreed to provide us with ready access to its newest and most powerful miners, at their most competitive prices. In 2023, we executed additionaltwo purchase orders totaling $480 millionunder the Master Agreement to acquire a total of 99,840 new MicroBT miners (consisting of 8,320 M56S+ model miners, 22,684 M56S++ model miners, 20,778 M66 model miners, and 48,058 M66S model miners), primarily for use at our Corsicana Facility, for a total purchase price of approximately $453.4 million. Delivery of these miners began in the fourth quarter of 2023 and will be completed in monthly batches according to the delivery schedules specified under the applicable purchase order. All 99,840 miners are expected to be received and deployed by mid-2025. Upon full deployment of these new, state-of-the-art MicroBT immersion miners, we anticipate a total self-mining hash rate capacity of 38 EH/s. The Master Agreement also provides us with Bitmain Technologies Limited (“Bitmain”)options to purchase up to 66,560 additional miners per year through December 31, 2027, on the same terms as the initial order, for an aggregate of 265,000 additional 82,500 ASIC miners, including 30,000 of Bitmain’s latest generation Antminer model S19XP (140 TH/s) miners, and 52,500 S19j and S19j Pro miners, including 43,500 model S19j (90 TH/s) miners and 9,000 model S19j Pro (100 TH/s) miners, with anticipated monthly delivery and deployment schedules set through December 2022.miners. For additional discussion of our purchase orders with Bitmain,MicroBT, see the discussion under the heading “Mining Operations” in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report, as well as the purchase orders themselves, which are incorporated by reference as exhibits to this Annual Report.
We also deploy miners with Coinmint, LLC (“Coinmint”) under a month-to-month co-location mining services agreement (the “Coinmint Agreement”) at Coinmint’s Massena, New York facility (the “Coinmint Facility”). We continually evaluate our mining performance at the Coinmint Facility to determine the optimal deployment strategy.
We have primarily held the Bitcoin we mine on our balance sheet as a Bitcoin mining company, but we are constantly evaluating our Bitcoin retention policy to determine the most efficient use of that asset.
Data Center Hosting
On May 26, 2021, we completed the strategic acquisition (the “Whinstone Acquisition”) of Whinstone US, Inc. (“Whinstone”) from Northern Data AG, a German stock corporation (the “Northern Data”). For more information on the Whinstone Acquisition, see Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Strategic Acquisitions” and Part II, Item 8. “Financial Statements and Supplementary Data” under Note 4, “Acquisitions” included in the Notes to our Consolidated Financial Statements.
Our Hosting business is operated at our Whinstone Facility and focuses on providing co-location services for institutional-scale Bitcoin mining companies. The Whinstone Facility provides the critical infrastructure and workforce necessary for institutional-scale miners to deploy and operate their miners. We provide our clients with licensed space in specifically designed buildings to operate large quantities of miners with access to sufficient amounts of electricity to operate those miners under colocation agreements.
In pursuit of achieving the most efficient power strategy, Whinstone combines fixed low-cost power agreements, real-time spot power procurement and income from ancillary power services revenue. Riot benefits from this low-cost energy to maximize its production margins. The combination of Riot and Whinstone allows us to rapidly scale our self-mining business at one of the world’s largest mining facilities with power costs among the lowest in the industry.
After closing the Whinstone Acquisition, we announced a large-scale expansion of the Whinstone Facility by 400 MW, including 200 MW of immersion-cooled Bitcoin mining infrastructure, which is anticipated to bring the Whinstone Facility to 700 MW in total capacity of Bitcoin mining infrastructure. The expansion of the Whinstone Facility will provide us with the necessary infrastructure to efficiently operate our miners, scale our future operations and provide additional expansion opportunities in our Hosting business. After completion of the Whinstone expansion, the Whinstone Facility will be comprised of seven dedicated Bitcoin mining structures, designated as Buildings A through G.
As of December 31, 2021, our 400 MW expansion at the Whinstone Facility had achieved multiple progress milestones while navigating the challenges with the current state of the global supply chain, including the completion of the substation expansion to 700 MW, successful installation of the substation busbar, and 400 MW of high-voltage transformers. Whinstone also completed construction of Building F, our first self-mining building dedicated to immersion-cooled Bitcoin mining, while also advancing on its second immersion-cooled dedicated building, Building G. In December 2021, Whinstone also received most of the structural components required for Buildings D, E, and G. The construction completion timeline is currently on-time, despite global supply chain shortages and delays.
Whinstone also generates engineering and construction services revenue from hosting customers on site, including revenue derived from the fabrication, installation and maintenance services and deployment assistance on immersion-cooling technology for Bitcoin mining.
Electrical Products and Engineering
On December 1, 2021, we acquired all of the issued and outstanding equity interests of Ferrie Franzmann Industries, LLC (d/b/a ESS Metron) (“ESS Metron”). ESS Metron is one of the world’s leading designers and manufacturers of power distribution equipment. Our strategic acquisition of ESS Metron provides us with access to critical electrical components and engineering services in connection with our development of our Hosting business infrastructure at the Whinstone Facility, as well as with potential future expansion projects. ESS Metron is a key strategic partner in our development and deployment of our immersion-cooling technology. For more information on the ESS Metron Acquisition, see Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Strategic Acquisitions” and Part II, Item 8. “Financial Statements and Supplementary Data” under Note 4, “Acquisitions” included in the Notes to our Consolidated Financial Statements.
Mining Pools
A “mining pool” is a service operated by a mining pool operator that pools the resources of individual miners to share their processing power over a network and split rewards according to the amount of hash rate they contributed to the probability of placing a block on the blockchain.network. Mining pools emerged in response to the growing difficulty and network hash rate competing for Bitcoin rewards on the Bitcoin blockchain as a way of lowering costs and de-riskingreducing the risk of an individual miner’s mining activities.
The mining pool operator provides a service that coordinates the computing power of the independent mining enterprises participating in the mining pool. The pool uses software that coordinates the pool members’ hash rate, identifies new block rewards, records how much work all the participants are doing, and assigns Bitcoin rewards to its participants in proportion to the hash rate each participant contributed to the successful mining transaction. Fees are paid to the mining pool operator to cover the costs of maintaining the pool and are deducted from amounts we may otherwise earn. Fees (and payouts) fluctuate and historically have been no more than approximately 2% per reward earned, on average. Mining pools are subject to various risks such as disruption and down time. In the event that a pool we utilize experiences down time or is not yielding returns, our results may be impacted.
Competition
Bitcoin mining at scale is a highly competitive environment that operates 24/7 around the world. The primary drivers of competition are demand for Bitcoin, sufficient capital resources to acquire large quantities of high-quality miners, the ability to secure these miners from a limited number of suppliers on rapid delivery schedules, and the ability to execute on those miner deployments with the best-in-class mining infrastructure to generate the highest productivity.
Recently, there has been a significant increase in the number of Bitcoin miners attempting to expand their mining operations at scale. As more Bitcoin miners enter the space, we expect additional pressure on the industry, with greater competition for access to miners and mining infrastructure which is in limited supply.
Data center hosting-particularly in the Bitcoin mining space-is also highly competitive. Institutional Bitcoin mining customers demand access to mining infrastructure that can supply large amounts of reliable, low-cost electricity, with a best-in-class team that can execute on deploying miners on compressed timelines. We have entered into a long-term power purchase agreement with our energy supplier atutilized two types of mining pools:
● | The first type of mining pool uses software that coordinates the pool members’ hash rate, identifies new block rewards, records how much work all the participants are doing, and assigns Bitcoin rewards to its participants in proportion to the hash rate each participant contributed to the successful mining transaction. Fees are paid to the mining pool operator to cover the costs of maintaining the pool and are deducted from amounts we may otherwise earn. Fees and payouts fluctuate and historically have been no more than approximately 2% per reward earned, on average. We utilized this type of mining pool during the years ended December 31, 2021 and throughout 2022, until mid-December 2022. |
● | The second type of mining pool pays Bitcoin rewards utilizing a “Full-Pay-Per-Share” payout of Bitcoin based on a contractual formula, which calculates payout primarily based on the hash rate provided by us to the mining pool as a percentage of total network hash rate, along with other inputs. We are entitled to consideration even if a block is not successfully placed by the mining pool operator. We transitioned completely to this type of mining pool in December 2022, and utilized it for the year ended December 31, 2023. |
Immersion-cooling
The initial phase of the Whinstonedevelopment of the Corsicana Facility which allows us to control our power costs and project them long-term, enabling us to focus on developing best-in-class mining infrastructure and delivering best-in-class services.
Research and Development
During 2021, we announcedinvolves the first industrial scale deploymentconstruction of 200 MW400 megawatts (“MW”) of immersion-cooled Bitcoin mining at the Whinstone Facility. We expect to continue developing immersion-cooling Bitcoin mining technologies as we build newMining and Data Center Hosting infrastructure. We anticipate that immersion-cooling technology will present many unique opportunities to increase efficiencies in Bitcoin mining. Wemining and are constantly evaluating new and emerging technologies in the Bitcoin ecosystem to make our mining operations more efficient.
Materials and Suppliers
We maintain several key supplier relationships that are important to our business to secure mining hardware and infrastructure components and other materials. Given the complexity of mining hardware, there are few suppliers that can produce miners at scale. Our historic purchase orders with Bitmain have future delivery schedules that can extend out many months before those miners are delivered to our Whinstone Facility. These fluctuations in delivery timelines requires us to purchase miners well in advance of when we anticipate deploying those miners.
Our expansion at the Whinstone Facility requires large quantities of electrical infrastructure components and construction materials. We seek to procure these materials from our suppliers in sufficient quantities so that we can deploy miners at scale on accelerated timelines. Further, our immersion-cooled Bitcoin mining requires large volumes of specialized non-conductive fluid, with limited manufacturers. We have procured most of our anticipated key materials for the expansion of the Whinstone Facility.
Regulatory
Cryptocurrency mining is largely an unregulated activity at both the state and federal level. We anticipate that cryptocurrency mining will be a focus for increased regulation in the near- and long-term, and we cannot predict how future regulations may affect our business or operations.
State regulation of cryptocurrency mining is important with respect to where we conduct our mining operations. Our Whinstone Facility is located in the State of Texas, which is one of the most favorable regulatory environments for cryptocurrency miners. However, we also have operations in New York, which has generally been more aggressive in its regulation of cryptocurrency. Current New York regulations, in our view, do not impact our decision to operate our miners at the Coinmint Facility in Massena, New York; however, if the regulatory landscape changes, we would have to evaluate whether to relocate our miners to our Whinstone Facility in Texas, which could be costly and we would not be able to operate the miners while they are being relocated.
In January 2022, we received a letter from a group of Senators and members of Congress requesting information about our current and planned energy usage. On February 24, we replied to the letter and provided the Senators and members of Congress with the information they requested.
Further, in March 2022, the United States announced plans to establish a unified federal regulatory regime for cryptocurrency, and a group of United States Senators sent a letter to the United States Treasury Department asking Treasury Secretary Yellen to investigate Treasury’s ability to monitor and restrict the use of cryptocurrencies to evade sanctions imposed by the United States. We are unable to predict the impact that any new regulations may have on our business at the time of filing this Annual Report. We continue to monitor and proactively engage in dialogue on legislative matters related to our industry.
As the regulatory and legal environment evolves, we may become subject to new laws, such as further regulation by the SEC and other agencies, which may affect our mining and other activities. For additional discussion regarding our belief about the potential risks existing and future regulation pose to our business, see Part I, Item 1A. “Risk Factors” beginning on page 13 of this Annual Report.
Environmental
There are increasing concerns over the large energy usage of Bitcoin mining and its effects on the environment. Many mainstream media reports focus exclusively on the energy requirements of Bitcoin mining and cite it as an environmental concern. However, those reports tend to omit the important benefits associated with that energy consumption. For instance, in February 2021 and 2022, we voluntarily reduced our operations and curtailed our energy usage to allow our energy provider to redirect our power allotment back into the ERCOT market. By curtailing our operations and reducing our energy usage, we immediately help to stabilize the grid by redirecting our power allotment back out into the ERCOT market where it can be delivered to the areas of greatest need, such as heating homes and powering hospitals, helping to reduce the frequency and impact of power failures and price surges. In exchange for powering down our systems in response to these instances of high electricity demand, we receive the difference between our cost of power and the price at which it is sold on the ERCOT market (less applicable fees payable to our consultants who assist with our participation in the ERCOT Demand Response Program), which ultimately benefits us, other consumers participating in the ERCOT market, and the overall health of the Texas grid.
Human Capital Resources
At December 31, 2021, we had a total workforce of approximately 335 employees across our entire organization and subsidiaries, including professionals in engineering, information and technology, operations, construction, finance, legal, communications and Bitcoin mining. Of our total workforce, approximately 285 employees were in engineering, construction and Bitcoin mining operations and approximately 50 were in a general and administrative support function, such as information and technology, finance, legal and communications. Approximately 53% of our workforce was in Colorado and 44% was in Texas.
Our strategy with human capital resources is to align the interests of our employees with our key long-term success drivers. In execution of this philosophy, we adopted a long-term performance incentive plan in August 2021 under our Riot Blockchain, Inc. 2019 Equity Incentive Plan, as amended. Under this performance plan, all eligible employees are granted performance-based restricted stock units (“PSUs”) that vest based on our achievement of certain performance milestones as an organization. Certain eligible employees under the performance plan would be eligible to receive cash in lieu of PSU awards based on our achievement of these same performance milestones. We believe our performance plan is a key incentive for our employees that aligns their long-term interests with our long-term objectives as an organization. Our management team believes our relations with our employees to be good.
We want to attract a pool of diverse and best-in-class candidates and foster their career growth once they become employees. We seek to hire the best talent available, rather than solely rely on educational background, and have provided job openings, including in local communities and large cities, for candidates from various backgrounds. Our goal is a long-term, growth-oriented career for every employee. We also believe that our ability to retain our workforce is dependent on our ability to foster an environment that is sustainably safe, respectful, fair and inclusive of everyone and promotes diversity, equity and inclusion inside and outside of our business.
We compare salary and wages against quantitative benchmarks and adjust to ensure wages are competitive, and have a robust process for ensuring pay equity across the Company. In addition, we provide a comprehensive range of benefits options, including medical plan options for employees and family members.
Immersion-cooling
In October 2021, in connection with the 400 MW expansion of Whinstone, we announced that 200 MW of this expansion would be committed to utilizing immersion-cooling technology. This development encompasses two buildings currently under construction which are expected to host approximately 46,000 of the S19 Series Antminer ASIC miners we have purchased from Bitmain, which are expected to be delivered and deployed on a rolling monthly basis throughout 2022.
When miners are immersion-cooled, they operate in a more stable environment that is better able to dissipate the heat generated by the miners’ operation, allowing the equipment to run at sustained higher productivity rates for longer periods of time. Based on industry data and the Company’s own preliminary immersion-cooling test results, an estimated 25% increase in hash rate is expected, with an estimated potential to increase our miners’ performance by as much as 50% over traditional air-cooled techniques. We are continuing to test our immersion-cooling mining operations and, if our desired performance metrics are achieved, we plan to leverage our infrastructure development capabilities to expand the implementation of our immersion-cooled Bitcoin mining hardware to increase our Bitcoin mining hash rate without relying solely on purchasing additional new miners and mining equipment, which we believe will result in increased operating efficiencies, and, thus, improved capital efficiencies.
Data Center Hosting
Our Data Center Hosting business segment is operated at our Rockdale Facility and focuses on providing co-location services for institutional-scale Bitcoin mining companies. The Rockdale Facility provides the critical infrastructure and workforce necessary for institutional-scale miners to deploy and operate their miners in buildings specifically designed to operate Bitcoin miners at scale.
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In pursuit of achieving the most efficient power strategy, we combine fixed low-cost power agreements, real-time spot power procurement, and credit from our participation in ancillary power services programs established by the Electric Reliability Council of Texas (“ERCOT”). We benefit from this low-cost energy by maximizing production margins.
During the year ended December 31, 2023, we completed our expansion of the Rockdale Facility, more than doubling its developed capacity from the time of its acquisition in May 2021.
The expansion of our Rockdale Facility has provided us with the capacity to deploy our current fleet of miners and bring our Bitcoin Mining business segment entirely in-house, while still allowing us to continue offering Data Center Hosting services. We believe deploying our miners at the expanded Rockdale Facility offers many advantages for our Bitcoin Mining operations, such as operating without incurring third-party colocation services fees and doing so at the low fixed energy costs available to the Rockdale Facility under its long-term Power Purchase Agreement (“PPA”).
Engineering
Our Engineering business segment designs and manufacturers power distribution equipment and custom engineered electrical products that provide us with the ability to vertically integrate many of the critical electrical components and engineering services necessary for our Corsicana Facility development and Rockdale Facility expansion and to reduce our execution and counter-party risk in ongoing and future expansion projects. Engineering and other specialized talent employed in our Engineering business segment also allows us to continue to explore new methods to optimize and develop a best-in-class Bitcoin mining operation and has been instrumental in the development of our industrial-scale immersion-cooled Bitcoin mining hardware.
Our Engineering business segment also provides electricity distribution product design, manufacturing, and installation services primarily focused on large-scale commercial and governmental customers and serves a broad scope of clients across a wide range of markets including data center, power generation, utility, water, industrial, and alternative energy. Products are custom built to client and industry specifications.
Competition
Our business is highly competitive and operates 24 hours a day, 7 days a week, on a global basis. The primary drivers of competition are demand for Bitcoin, sufficient capital resources to acquire large quantities of high-quality miners, the ability to secure these miners from a limited number of suppliers on rapid delivery schedules, and the ability to execute on those miner deployments with the best-in-class mining infrastructure to generate the highest returns while incurring the lowest costs to mine.
Our competition in the Bitcoin mining space fluctuates due to a number of factors, including, but not limited to, the value of Bitcoin rewards for mining and public perception. See more details below under “Industry Trends”. Our main competitors generally include other large Bitcoin mining companies, both publicly listed and private, as well as other Bitcoin miners who participate in mining pools.
Data center hosting, particularly in relation to Bitcoin mining, is also highly competitive. Institutional Bitcoin mining customers demand access to mining infrastructure that can supply large amounts of reliable, low-cost electricity, with best-in-class teams that can execute on deploying miners on compressed timelines. In order to ensure this supply of large amounts of low-cost electricity, we have entered into long-term power purchase agreements with our energy supplier at the Rockdale Facility, which allows us to control our power costs and project them over a long-term, enabling us to focus on developing best-in-class mining infrastructure and delivering best-in-class services.
Industry Trends
During 2022 and 2023, we observed several companies in the Bitcoin ecosystem experience significant challenges and initiate bankruptcy proceedings due to the significant volatility in the price of Bitcoin, the increase in interest rates, the volatility in spot prices of power, and other national and global macroeconomic factors. We anticipate this trend will likely continue as companies attempt to shift their business models to operate on significantly compressed margins. Further affecting the margins of the companies within the Bitcoin ecosystem, the Bitcoin reward for solving a block is subject to periodic incremental halving, as described below under the heading “Factors Affecting Profitability - Halving.”
The dramatic increase in the price of Bitcoin observed in the market during prior years caused many companies to over-leverage themselves, thus operating in potentially unsustainable ways given the recent variability in the price of Bitcoin. We chose to refrain from engaging in any significant debt-financing activities during this period and, as a result, has not been subject to the significant
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debt-service shortfalls some of our competitors are experiencing. Despite such challenges in the ecosystem, we continue to focus on building long-term stockholder value by taking strategic action to vertically integrate our business, expanding the Rockdale Facility and developing the Corsicana Facility. Management believes this focus will positively affect each of our three business segments by providing more capacity for our Bitcoin Mining and Data Center Hosting operations, and by capitalizing on supply chain efficiencies garnered through our Engineering segment. As we grow our business, we continue to focus on deploying our efficient Bitcoin mining fleet, at scale, while realizing the benefits of being an owner and operator of our Bitcoin Mining and Data Center Hosting facilities.
We anticipate companies in our industry will continue to experience challenges, and that 2024 may continue to be a period of consolidation in the Bitcoin mining industry. Further, given our relative position, liquidity, and absence of any significant long-term debt, we believe we are well positioned to benefit from such consolidation. We are continuously evaluating strategic opportunities which we may decide to undertake as part of our strategic growth initiatives; however, we can offer no assurances that any strategic opportunities which we decide to undertake will be achieved on the schedule or within the budget we anticipate, if at all, in our competitive and evolving industry, and our business and financial results may change significantly as a result of such strategic growth.
The recent shutdowns of certain digital asset exchanges and trading platforms due to fraud or business failure has negatively impacted confidence in the digital asset industry as a whole and led to increased oversight and scrutiny of the industry. We did not have any exposure to any digital asset lenders or exchanges who have declared bankruptcy or have suspended operations. We only hold and sell Bitcoin that we have mined and do not sell, hold, or redeem any Bitcoin for any other parties. Our Bitcoin is held in cold storage wallets by a well-known U.S.-based third-party digital asset-focused custodian. We also sell our Bitcoin using our custodian’s U.S. brokerage services.
In 2023, the banking industry and financial services sector experienced disruptions and instability. In March 2023, Silvergate Capital Corporation, the holding company for Silvergate Bank, which was primarily focused on the digital asset industry, announced its intent to wind down operations and voluntarily liquidate its holdings. Also in March, Silicon Valley Bank and Signature Bank both closed. The Federal Deposit Insurance Corporation (“FDIC”) was appointed receiver following their closures and transferred substantially all assets of the former banks to newly created, FDIC-operated bridge banks in an action to protect all depositors of the banks. In May 2023, First Republic Bank was closed, and the FDIC sold substantially all of First Republic Bank’s assets to JP Morgan Chase & Co.
Although we maintained certain operating accounts with Signature Bank prior to its closure, we have since transferred all our deposits previously held with the bank to other banking institutions. We did not lose access to our accounts or experience interruptions in banking services, and we suffered no losses with respect to our deposits at Signature Bank as a result of the bank’s closure. We did not have any banking relationships with Silicon Valley Bank, Silvergate Bank, or First Republic Bank, and currently hold our cash and cash equivalents at multiple banking institutions. Although we did not suffer any losses, we continue to monitor for updates to mitigate any future impacts we may be subject to as a result of instability of the banking industry and financial services sector.
Research and Development
In 2022, we initiated development of the Corsicana Facility to expand our Bitcoin Mining and Data Center Hosting capabilities on a 265-acre site in Navarro County, Texas, located next to the Navarro Switch. Once complete, we expect the Corsicana Facility to have one gigawatt of developed capacity for Bitcoin Mining and Data Center Hosting operations.
The initial phase of the development of the Corsicana Facility involves the construction of 400 MW of immersion-cooled Bitcoin Mining and Data Center Hosting infrastructure, as well as a high-voltage power substation and transmission facilities to supply power and water to the facility. Construction of the substation and the data centers is ongoing and operations are expected to commence by the end of the first quarter of 2024, following commissioning of the substation.
Materials and Suppliers
We maintain several key supplier relationships that are important to our business to secure mining hardware and infrastructure components and other materials. Given the complexity of developing mining hardware, there are few suppliers that can produce miners at scale. For example, our purchase orders with MicroBT have future delivery schedules that extend out many months before those miners are delivered to our Rockdale Facility. These fluctuations in delivery timelines require us to plan to purchase miners well in advance of when we anticipate deploying those miners.
Our development of the Corsicana Facility requires large quantities of electrical infrastructure components and construction materials. We seek to procure these materials from our suppliers in sufficient quantities so that we can deploy miners at scale on
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accelerated timelines. Further, our immersion-cooled Bitcoin Mining activities require large volumes of specialized non-conductive fluid, for which there are limited manufacturers.
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 Annual 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 development of the 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 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.
Regulatory
We anticipate that Bitcoin mining will be a focus for potential increased regulation in the near- and long-term, and we cannot predict how future regulations may affect our business or operations.
State regulation of Bitcoin mining is an important consideration with respect to where we conduct our mining operations. Our Rockdale Facility and our Corsicana Facility are both located in the State of Texas. To the extent that there is any state regulation of Bitcoin mining, we believe Texas is likely to remain one of the most favorable regulatory environments for Bitcoin miners.
In March 2022, the SEC issued proposed climate-related disclosure requirements for registrants and received thousands of comments on the proposal. We continue to await the release of any potential finalized rules requiring such disclosures following the analysis of the comments.
In January 2023, the Board of Governors of the Federal Reserve System (the “Federal Reserve”), Office of the Comptroller of the Currency, and FDIC issued a joint statement regarding perceived risks to banks with clients in crypto-asset industries. In January 2023, the Federal Reserve also issued a policy statement broadening its regulatory authority to limit the activities of state-chartered banks. Several leaders in the U.S. Congress sent oversight letters to the prudential regulators pushing back on any efforts to place limits on banking activity for digital asset industries. Riot has also diversified banking relationships to mitigate any potential regulatory risk with respect to financial services.
Additionally, in January 2023, the U.S. House of Representatives announced its first ever Financial Services Subcommittee on Digital Assets and its intention to develop a regulatory framework for the digital asset industry. Bipartisan leadership of the Senate Banking Committee announced that goal as well. Over the course of 2023, the House Financial Services Committee passed various bills, including a bill to provide a market structure for digital assets, but no such legislation has received a vote on the floor of the full House.
In January 2024, a decade after initial applications were filed, the SEC approved a series of spot Bitcoin exchange-traded funds, which have received billions of dollars of in-flows.
Also in January 2024, the U.S. Energy Information Administration initiated a provisional survey of electricity consumption information from cryptocurrency mining companies operating in the United States. The survey was authorized by the Office of Management and Budget as an emergency data request. This action is purely a survey, and it remains unclear whether or how the information will be used in future regulatory efforts.
Leaders on both the U.S. House Financial Services Committee and U.S. Senate Banking Committee have expressed interest in passing legislation to provide additional regulatory authority to address risks related to the use of digital assets in illicit financial activity. The U.S. Treasury Department has also requested additional authorities to address such risks. However, we have not seen sufficient support emerge in favor of any particular proposal to anticipate any specific changes at this time.
We are unable to predict the impact that any new standards, legislation, or regulations may have on our business at the time of filing this Annual Report. However, we continue to monitor and proactively engage in dialogue on regulatory and legislative matters related to our industry.
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As the regulatory and legal environment evolves, we may become subject to new laws, such as further regulation by the SEC and other agencies, which may affect our Bitcoin Mining and other activities. For additional discussion regarding our belief about the potential risks that existing and future regulation pose to our business, see Part I, Item 1A. “Risk Factors” of this Annual Report.
Environmental
There are increasing concerns over the quantity of energy, particularly from non-renewable sources, used for Bitcoin mining and its effects on the environment. Many media reports focus exclusively on the energy requirements of Bitcoin mining and cite it as an environmental concern. However, those reports tend to omit discussion of the positive contributions associated with Bitcoin mining to other customers on the electrical grid. Bitcoin mining operations present a stable demand for energy and can be quickly curtailed, uniquely positioning businesses that engage in Bitcoin mining to respond to increased electricity demand in emergency situations. Throughout 2023, we voluntarily reduced our operations and curtailed our energy consumption to allow our energy provider to redirect our power allotment back into the ERCOT market during extreme weather events. By taking such actions, we immediately helped to stabilize the grid by allowing our power allotment to be delivered to the areas of greatest need, such as heating homes and powering hospitals. Overall, our operations incentivize new power generation development and our actions help to reduce the frequency and impact of power failures and electricity price surges. In exchange for powering down our systems in response to high electricity demand, we receive benefits associated with the difference between our contractual cost of power and the price at which such power is sold on the ERCOT market (less any applicable fees payable to our consultants who assist with our participation in the ERCOT Demand Response Services Program). Additionally, we voluntarily participate in load response programs operated by ERCOT, whereby we temporarily give ERCOT the right to curtail a set portion of our power load at their discretion in exchange for a fee. Ultimately, these benefits are shared by us and all participants in the ERCOT market, through the positive incentivizing of energy supply and demand consistency across the ERCOT marketplace, which contributes positively to the overall health of the Texas grid.
Human Capital Resources
During the past year, we have made substantial investments in our workforce to retain and attract best-in-class employees, substantially growing our employee base, while also internally promoting individuals to key positions across the Company. As of December 31, 2023, we had a total workforce of approximately 534 employees across our entire organization, including professionals in engineering, information and technology, operations, construction, manufacturing. finance, legal, communications, and Bitcoin Mining operations. Of our total workforce, approximately 431 employees were in engineering, construction, manufacturing, and Bitcoin Mining operations and approximately 103 employees were in a general or administrative support function, such as information and technology, finance, legal or communications. Approximately 43% of our workforce was in Colorado and 53% was in Texas.
Our strategy with human capital resources is to align the interests of our employees with our key long-term success drivers. In execution of this strategy, we adopted a long-term performance incentive program, under which all eligible employees are granted a combination of service-based restricted stock awards that generally vest over a three-year period and performance-based restricted stock awards that are eligible to vest based on our achievement of specific performance or total stockholder return milestones. During 2023, certain employees under the long-term performance program were eligible to receive cash in lieu of restricted shares of our common stock awards based on achievement of these same performance milestones. We believe our performance program is a key incentive for our employees that aligns their long-term interests with our long-term objectives as an organization.
In addition to Riot’s long-term incentive program and competitive cash compensation practices, our employees are provided with excellent health benefits, paid parental leave, paid time off, and additional benefits.
We recognize the positive impact that leaders within a company can have on their teams, and we believe every employee is and should be a leader within our Company. Consequently, in addition to seeking out top talent from outside of our organization to foster this positive impact, we offer management and executive leadership training, and encourage the continuous development of leaders across the Company, and motivate every Company employee to take ownership over their impact on the Company’s success.
We seek to attract a pool of diverse, best-in-class candidates and foster their career growth by hiring the best talent available, rather than relying solely on educational background. In support of such initiative, we look for candidates in local communities and large cities alike, and from a variety of backgrounds. Our goal is a long-term, growth-oriented career for each employee. We also believe that our ability to retain our workforce is dependent on our ability to foster an environment that is sustainably safe, respectful, fair, and inclusive of everyone, and promotes diversity, equity, and inclusion both inside and outside of our business.
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Diversity, Equity, and Inclusion
We support diversity and inclusion in a workplace where employees can thrive, and our policies are designed to promote fairness and respect for everyone. Diverse backgrounds, experiences and opinions are encouraged and welcomed. In support of such diversity and inclusion, we act in accordance with our Code of Ethics and Business Conduct and our Non-Discrimination and Anti-Harassment Policy to create a safe environment free from discrimination or harassment that respects the human rights of our employees. We strive to achieve a workplace where opportunities for success are created and available for all employees. In support of this goal, in 2023, we required all employees to complete unconscious bias and harassment trainings.
Compensation and Benefits
Our compensation programs are designed to provide incentives to attract, retain, and motivate employees to achieve our long-term goals. Specifically, we compare salary and wages against quantitative benchmarks and adjust monetary compensation to ensure wages are competitive and consistent with employee positions, skill levels, experience, and geographic location. We maintain a robust process for ensuring pay equity across the Company and increases in incentives and compensation based on merit and performance.
We provide a comprehensive range of benefits options, including medical, dental, and vision insurance for employees and family members, paid and unpaid leaves, and life and disability/accident insurance coverage. Benefits for employees outside of the United States are provided based on country-specific practices and are intended to support the health and well-being of our employees and their families.
Bitcoin Mining Results
Bitcoin Mining Production and CryptocurrencyBitcoin Sales
The Company measuresOne way we measure the success of itsour operations in one respect,is by the number and U.S. Dollar (“$”) value (in thousands of $) of the cryptocurrencyBitcoin rewards it earnswe earn from itsour Bitcoin Mining activities. The following table presents additional information regarding our Mining operations, including cryptocurrencyBitcoin production and sales of the cryptocurrency the Company mines. During 2021Bitcoin we only mined Bitcoin, and during 2020 and 2019, nearly all of our operations were focused on mining Bitcoin.mine.
| | | | | |
|
| Quantity |
| Amounts | |
Balance as of January 1, 2021 |
| 1,078 | | $ | 10,186 |
Revenue recognized from Bitcoin mined |
| 3,812 | |
| 184,422 |
Exchange of Bitcoin for employee compensation |
| (6) | |
| (295) |
Realized gain on sale/exchange of Bitcoin |
| — | |
| 253 |
Impairment of Bitcoin |
| — | |
| (43,973) |
Balance as of December 31, 2021 |
| 4,884 | |
| 150,593 |
Revenue recognized from Bitcoin mined |
| 5,554 | |
| 156,870 |
Proceeds from sale of Bitcoin |
| (3,425) | |
| (79,529) |
Exchange of Bitcoin for employee compensation | | (39) | | | (1,495) |
Realized gain on sale/exchange of Bitcoin |
| — | |
| 30,346 |
Impairment of Bitcoin |
| — | |
| (147,365) |
Balance as of December 31, 2022 |
| 6,974 | |
| 109,420 |
Cumulative effect upon adoption of ASU 2023-08 | | — | | | 5,994 |
Revenue recognized from Bitcoin mined |
| 6,626 | |
| 188,996 |
Bitcoin receivable | | (21) | | | (878) |
Proceeds from sale of Bitcoin |
| (6,185) | |
| (176,219) |
Exchange of Bitcoin for employee compensation | | (32) | | | (869) |
Change in fair value of Bitcoin |
| — | |
| 184,734 |
Balance as of December 31, 2023 |
| 7,362 | | $ | 311,178 |
Quantities | ||||||||
(in coins) | Amounts | |||||||
Balance at January 1, 2019 | 164 | $ | 707 | |||||
Revenue recognized from cryptocurrencies mined | 944 | 6,741 | ||||||
Mining pool operating fees | — | (135 | ) | |||||
Purchase of miner equipment with cryptocurrencies | (9 | ) | (99 | ) | ||||
Proceeds from sale of cryptocurrencies | (585 | ) | (3,196 | ) | ||||
Realized gain on sale/exchange of cryptocurrencies | — | 665 | ||||||
Impairment of cryptocurrencies | — | (844 | ) | |||||
Balance at December 31, 2019 | 514 | 3,839 | ||||||
Revenue recognized from cryptocurrencies mined | 1,033 | 11,984 | ||||||
Mining pool operating fees | — | (146 | ) | |||||
Proceeds from sale of cryptocurrencies | (500 | ) | (8,298 | ) | ||||
Realized gain on sale/exchange of cryptocurrencies | 26 | 5,184 | ||||||
Impairment of cryptocurrencies | — | (989 | ) | |||||
Cryptocurrencies received from sale of equipment | 5 | 52 | ||||||
Balance at December 31, 2020 | 1,078 | 11,626 | ||||||
Revenue recognized from cryptocurrencies mined | 3,812 | 184,422 | ||||||
Proceeds from sale of cryptocurrencies | (6 | ) | (295 | ) | ||||
Realized gain on sale/exchange of cryptocurrencies | — | 253 | ||||||
Impairment of cryptocurrencies | — | (36,462 | ) | |||||
Balance at December 31, 2021 | 4,884 | $ | 159,544 |
As the above table shows, weWe increased the quantity of Bitcoin rewards earned from our Bitcoin Mining operations from 1,0335,554 Bitcoin mined in fiscal year 2020,2022, to 3,8126,626 Bitcoin mined in fiscal year 2021,2023, representing an increase of approximately 269% in the number of Bitcoin mined. The revenue we19.3%. Revenue recognized from our Bitcoin Mining activities increased from approximately $12.0$156.9 million during fiscal year 20202022 to $184.4$189.0 million during fiscal year 2021,2023, representing an increase of approximately 1,439% in revenue from our Mining operations.20.5%. The increase was due to higheran increase in Bitcoin values in the 2021 period, averaging $45,744 per coinrewards earned as compared to $11,461 per coin in the 2020 period anda result of an increase in the number of miners deployed from 7,04388,556 as of December 31, 20202022, to 30,907112,944 as of December 31, 2021.
The revenue we recognized from our Mining activities increased from approximately $6.7 million during fiscal year 2019 to $12.0 million during fiscal year 2020, representing an increase of approximately 78%. The increase was due to higher Bitcoin values in the 2020 period, averaging $11,461 per coin as compared to $7,405 per coin in the 2019 period and2023, partially offset by an increase in the numberglobal network hash rate.
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Factors Affecting Profitability
Market Price of Bitcoin
Our business is heavily dependent on the spot price of Bitcoin. The prices of cryptocurrencies, including Bitcoin, have experienced substantial volatility, meaning that high or low prices may be based on speculation and incomplete information, may be subject to rapidly changing investor sentiment, and may be influenced by factors such as technology, regulatory void or changes, fraudulent actors, manipulation, and media reporting. Bitcoin (as well as other cryptocurrencies) may have value based on various factors, including, but not limited to, their acceptance as a means of exchange by consumers and producers, scarcity, and market demand, all of which are beyond our control.
Halving
Further affecting the industry, and particularly for the Bitcoin blockchain, the cryptocurrencyBitcoin reward for solving a block is subject to periodic incremental halving. Halving is a process designed to control the overall supply and reduce the risk of inflation in cryptocurrencies usingBitcoin, which uses a Proof-of-Workproof-of-work consensus algorithm. At a predetermined block, the mining reward is cut in half, hence the term “halving”.“halving.” For Bitcoin our most significant cryptocurrency asset to which the majority of our mining power is devoted, the reward was initially set at 50 Bitcoin currency rewards per block. The Bitcoin blockchain has undergone halvinghalvings three times since its inception as follows: (1) on November 28, 2012, at block height 210,000; (2) on July 9, 2016, at block height 420,000; and (3) on May 11, 2020, at block height 630,000, when the reward was reduced to its current level of 6.25 Bitcoin per block. The next halving for the Bitcoin blockchain is currently anticipated to occur in MayApril 2024 at block height 840,000. This processHalvings will reoccurcontinue to occur until the total amount of Bitcoin currency rewards issued reaches approximately 21 million and the theoretical supply of new Bitcoin is exhausted, which is expected to occur around the year 2140. Many factors influence the price of Bitcoin, and potential increases or decreases in prices in advance of or following a future halving is unknown.
Network Hash Rate and Difficulty
Generally, a Bitcoin miner’s chance of solving a block on the Bitcoin blockchain and earning a Bitcoin reward is a function of the miner’s hash rate, relative to the global network hash rate (i.e., the aggregate amount of computing power devoted to supporting the Bitcoin blockchain at a given time). As demand for Bitcoin has increased, the global network hash rate has increased rapidly, and as moregreater adoption of Bitcoin occurs, we expect the demand for new Bitcoin will likewise increase as more mining companies are drawn into the industry by this increased demand. Further, as more anda greater number of increasingly powerful miners arehave been deployed, the network difficulty for Bitcoin has consequently also increased. Network difficulty is a measure of how difficult it is to solve a block on the Bitcoin blockchain, which is adjusted every 20162,016 blocks (every(approximately every 2 weeks approximately)weeks) so that the average time between each block validation remains approximately ten minutes. A high difficulty means that it will take more computing power will be required in order to solve a block and earn a new Bitcoin reward, which, in turn, makes the Bitcoin network more secure by limiting the possibility of one miner or mining pool gaining control of the network. Therefore, as new and existing miners deploy additional hash rate, the global network hash rate will continue to increase, meaning a miner’s share of the global network hash rate (and therefore its chance of earning Bitcoin rewards) will decline if it fails to deploy additional hash rate at pace with the industry.
For further discussion of the factors affecting our profitability, see the discussion under Part II, Item 7 “Management’s Discussion and Analysis”Analysis of Financial Condition and Results of Operations” under the heading “Summary of Bitcoin Mining Results” beginning on page 35 of this Annual Report, as well as the discussion of various risks, factors, and uncertainties we believe may affect our revenue and results of operations under Part I, Item 1A. “Risk Factors” beginning on page 13 of this Annual Report.
Performance Metrics
We seek to mine Bitcoin by using our miners to solve complex cryptographic algorithms to support the Bitcoin blockchain (in a process known as “solving a block”). In return for solving a block, we receive athe Bitcoin depending on the blockchain,reward, which we can hold for our account and attempt toor sell on the market to generate a profit.cash.
Hash rateRate
MinersBitcoin miners generally measure their capability in terms of hash rate, which is measured in terms of the number of cryptographic hashing algorithms solved (or “hashes”) per second. Generally, miners (or mining pools) with a greater hash rate relative to the global Bitcoin network hash rate deployed by miners on the Bitcoin blockchain at a given time will, over time, have a greater chance of earning a Bitcoin reward, as compared to miners with relatively lower total hash rates.
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However, as the relative market price for Bitcoin increases, more miners are encouraged to attempt to mine Bitcoin, which increases Bitcoin’s global network hash rate. Therefore, to remain competitive, miners seek to continually increase their total hash rate, creating a feedback loop: as Bitcoin gains popularity and its relative market price increases, more miners attempt to mine Bitcoin and its global network hash rate is increased; in response, existing miners and new miners devote more and more hash rate to the Bitcoin blockchain by adding more, and increasingly powerful, miners to attempt to ensure their ability to earn additional Bitcoin rewards, and, in response,rewards. As a result, the network difficulty of the Bitcoin network is increased to maintain the pace of new block additions, spurring miners to seek to deploy yet further hash rate to earn the same relative number of new Bitcoin rewards. In theory, this process should continually replicate itself until the supply of available Bitcoin is exhausted.
In response, miners have attempted to achieve greater hash rate by deploying increasingly sophisticated miners in ever greater quantities. This has become the Bitcoin mining industry’s great “arms race.” There are very few manufacturers of miners capable of producing a sufficient number of miners of adequate quality to meet this need, and scarcity results, leading to higher prices. Compounding this phenomenon, it has been observed that some manufacturers of Bitcoin miners may increase the prices for new miners as the market price of Bitcoin increases. Further, these manufacturers have also been impacted by the ongoing global supply chain crisis resulting from COVID-19, both in terms of increased prices for the components of these new miners resulting from the constrained supply of the semiconductors used in the production of the highly specialized ASIC chips miners rely on, and in terms of labor costs to manufacture new miners as workforces are affected by increased absenteeism due to COVID-19 restrictions and employee burnout. Thus, miner manufacturers are subject to increasing price pressures due to both increased demand for new miners and decreased supply of necessary components and labor, ultimately leading manufacturers to charge higher prices for new miners.
Intellectual Property
We actively use specific hardware and software for our Bitcoin miningMining operations. The Bitcoin blockchain is generally built on open-source code and, in certain cases, the source code and other software assets we use in our miningBitcoin Mining operations may be subject to an open-source license. For these works, we adhere to the terms of any license agreements that may be in place. We also rely upon the intellectual property rights of others in certain respects in connection with our immersion-cooling technology.
We currently rely uponon trade secrets, trademarks, service marks, trade names, copyrights, and other intellectual property rights, and on licenses to license the use of such intellectual property rights owned and controlled by others. In addition, we have developed and may further develop certain proprietary software and hardware applications in connection with Bitcoin miningMining operations, including our immersion-cooled Bitcoin Mining developments.
Information About Our Executive Officers
The following sets forth the name, age, and position of each of the persons who were serving as executive officers as of the filing of this Annual Report.
| | | | |
Name | | Age | | Position |
Jason Les | | 38 | | Director and Chief Executive Officer (principal executive officer) |
Benjamin Yi | | 41 | | Director and Executive Chairman |
Colin Yee | | 48 | | Executive Vice President, Chief Financial Officer (principal financial officer) |
William Jackman | | 40 | | Executive Vice President, General Counsel and Secretary |
Jason Chung | | 42 | | Executive Vice President, Head of Corporate Development & Strategy |
Ryan Werner | | 44 | | Senior Vice President, Chief Accounting Officer (principal accounting officer) |
Jason Les (age 38) has served as our Chief Executive Officer (“CEO”) since February 2021 and as a member of the board of directors since October 2017. He has been deeply involved with Bitcoin since 2013, with significant experience in Bitcoin mining, developments.as an engineer studying protocol development, and contributing to open-source projects. Mr. Les was previously a founding partner of Binary Digital from May 2017 to November 2020, a software-development company where he led the engineering team and coordinated project development for artificial intelligence, reverse engineering, and inter-software compatibility projects. Additionally, his background includes over a decade of unique experience as a former professional heads-up poker player. He holds a Bachelor of Science, Computer Science from the University of California, Irvine.
Benjamin Yi (age 41) has served as our Executive Chairman since May 2021, as a member of the Board since October 2018, and as Chairman of the board of directors from November 2020 through May 2021. In this role, he is directly involved in our day-to-day operations, playing a key role in setting and fulfilling the Board’s strategic aims for the Company. Mr. Yi brings significant corporate governance experience to Riot’s Board and executive management team, having served as an independent director and committee chair of several private and public companies. Prior to joining Riot, Mr. Yi led capital markets and corporate development at IOU
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Financial, a fin-tech enabled lender to small businesses across North America and investee company of Neuberger Berman from January 2017 through May 2021. Mr. Yi brings almost two decades of unique capital markets experience to the Company, and a particular expertise in fintech, specialty finance, and investing throughout a company’s capital structure. Mr. Yi holds a Bachelor of Commerce, specialist in Finance, major in Economics from University of Trinity College and a Master of Finance from University of Toronto – Rotman School of Management.
Colin Yee (age 48) has served as our Executive Vice President, Chief Financial Officer since July 2023, and Chief Financial Officer from September 2022 to July 2023. Previously, he was our Head of Corporate and Financial Operations from April 2022 to September 2022. Prior to joining Riot, Mr. Yee founded Clear Capital Management Corporation which has been operating since September 2007. He served as the Chief Operating Financial Officer of Avebury Partners, a leading asset management firm that operates within the real estate, geothermal exchange, and construction sectors, from March 2021 to March 2022. From 2016 to 2021, Mr. Yee served as the CFO for Forum Equity Partners, a large private equity firm specializing in real estate, renewable energy and infrastructure. Mr. Yee is a Chartered Professional Accountant and holds a Bachelor of Science in Cellular Biology and a Bachelor of Commerce in Accounting from the University of Calgary.
William Jackman (age 40) has served as our Executive Vice President, General Counsel and Secretary, since September 2022, and as General Counsel and Secretary since July 2021. As a member of the executive team, Mr. Jackman manages the Company’s legal affairs, drawing upon his unique business and legal acumen to navigate strategic decisions and develop innovative solutions to complex challenges. Previously, Mr. Jackman represented S&P 500 companies as well as other public companies in the areas of securities laws, mergers and acquisitions, and power generation. Prior to joining Riot, Mr. Jackman was a Leader of Public Companies and Securities at Roger Towers, P.A., one of Florida’s oldest and most established law firms, from March 2018 to January 2022. Additionally, he was a Senior Corporate Attorney at Holland & Knight LLP, a multinational law firm, from May 2014 through August 2017. Mr. Jackman holds dual Juris Doctorate law degrees from the Universities of Windsor and Detroit, as well as an MBA from Nova Southeastern, and is a member of the New York, Florida, and Ontario Bar Associations.
Jason Chung (age 42) has served as our Executive Vice President, Head of Corporate Development & Strategy since July 2023, and Head of Corporate Development & Strategy from June 2022 to July 2023. Mr. Chung spearheads the coordination of Riot's corporate development, capital markets, and investor relations efforts. Mr. Chung brings two decades of experience in investment banking and a wealth of knowledge in corporate finance to Riot. Prior to joining Riot, Mr. Chung served as Managing Director, M&A, at Nomura Holdings, Inc. from March 2017 through June 2022 and Executive Director, Mergers & Acquisitions from March 2014 through December 2016 where he advised global clients on cross-border transactions in the technology sector across multiple countries, including the US, Canada, Germany, Japan, Korea, France, and Singapore. Mr. Chung’s investment banking career spanned nearly $20 billion in mergers and acquisitions transactions and included building and growing advisory teams. Mr. Chung is a CFA charter holder and earned a Bachelor of Commerce and Finance degree, minoring in History, from the University of Toronto.
Ryan Werner (age 44) has served as our Senior Vice President and Chief Accounting Officer since September 2022. Previously, Mr. Werner served as our Vice President of Finance from March 2021 to September 2022. Mr. Werner is responsible for the leadership and oversight of our public accounting function, leading the Company’s team of accounting and finance professionals. Prior to joining Riot, Mr. Werner was a Senior Director, Real Estate and Transactions Accounting at UDR, an S&P 500 constituent and multifamily real estate investment trust, from March 2013 through March 2021. Mr. Werner began his career in Ernst & Young’s audit practice, where he was a Senior Manager and specialized in publicly traded companies. Mr. Werner is a Certified Public Accountant and holds a Master of Accounting and Information Systems degree, as well as a Bachelor of Science in Accounting & Business Administration degree, both from the University of Kansas.
There are no familial relationships among our executive officers and any directors, except that Mr. Yi is married to the first cousin of Hannah Cho, who serves on our board of directors. There are no arrangements or understandings between any of our executive officers and any other person pursuant to which any of such executive officers were selected.
Corporate Information
Our principal executive office is located at 3855 Ambrosia Street, Suite 301, Castle Rock, COColorado 80109, which is where our records are kept and the principal business address for our Chief Financial Officer and accounting staff, and our telephone number is (303) 794-2000. Our records are kept at our principal executive office.
We were incorporated on July 24, 2000 in the State of Colorado on July 24, 2000, under the name AspenBio, Inc. We, and have gonebeen through severala number of subsequent name changes and, effectivechanges. Effective October 19, 2017, we adopted our presentthe corporate name Riot Blockchain, Inc., and changed our state of incorporation to Nevada. Effective December 30, 2022, we adopted our current corporate name, Riot Platforms, Inc., and remained incorporated in Nevada.
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Our website address is www.riotblockchain.com.www.riotplatforms.com.
AvailableAdditional Information
You can access, free of charge,We file or furnish periodic reports and amendments thereto, including our annual reports on Form 10-K, proxy statements, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other information with the SEC. These reports, and any amendments to these reportsthereto, as filed with the SEC, under the Securities Exchange Actcan be accessed, free of 1934, as amendedcharge, on the SEC’s website www.sec.gov. These documents may also be accessed on our website: www.riotblockchain.com. Thesewww.riotplatforms.com through a link in the “Investors” section. The contemplated documents are placed on our website as soon as is reasonably practicable after their filing with the SEC. The information contained in, or that can be accessed through, theposted on our website is not part ofincorporated by reference into this Annual Report on Form 10-K/A.Report.
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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 I, Item 1A,1A., and elsewhere in this Annual Report. 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 Annual Report, as well as the risk, factors, uncertainties, and other information we disclose in other filings we make with the SEC before making an investment decision regarding our securities.
Risks Related to Our Ability to Grow Our Business
If we fail to grow our hash rate, we may be unable to compete, and our results of operations could suffer.
Generally, a Bitcoin miner’s chance of solving a block on the Bitcoin blockchain and earning a Bitcoin reward is a function of the miner’s hash rate (i.e., the amount of computing power devoted to supporting the Bitcoin blockchain), relative to the global network hash rate. As demand for Bitcoin has increased, the global network hash rate has increased, and as moregreater adoption of Bitcoin occurs, we expect the demand for Bitcoin will increase further, drawing more mining companies into the industry and furtherthereby increasing the global network hash rate. As new and more powerful miners are deployed, the global network hash rate will continue to increase, meaning a miner’s chance of earning Bitcoin rewards will decline unless it deploys additional hash rate at pace with the industry. Accordingly, to compete in this highly competitive industry, we believe we will need to continue to acquire new miners, both to replace those lost to ordinary wear-and-tear and other damage, and to increase our hash rate to keep up with a growing global network hash rate.
We plan to grow our hash rate by acquiring newer, more effective and energy-efficient miners. These new miners are highly specialized servers that are very difficult to produce at scale. As a result, there are limited producers capable of producing large numbers of sufficiently effective miners, and, as demand for new miners has increased in response to increased Bitcoin prices, we have observed the price of these new miners has increased. If we can’tare unable to acquire sufficient numbers ofenough new miners or access sufficient capital to fund our acquisitions, our results of operations and financial condition which could be adversely affectaffected, as could investments in our securities.
We may be impacted by macroeconomic conditions due to the global COVID-19 pandemicpandemics, epidemics or outbreaks of disease and the resulting global supply chain crisis.
Global trade conditions and consumer trends that originated during the COVID-19 pandemic continue to persist and may also have long-lasting adverse impact on us and our industry. For example, pandemic-relatedThere are continued risks arising from new pandemics, epidemics or outbreaks of disease, and ongoing COVID-19 related issues which have exacerbated port congestion and intermittent supplier shutdowns and delays, resulting in additional expenses to expedite delivery of new miners, as well as critical materials needed for our expansion plans. Further, miner manufacturers have been impacted by the constrained supply of the semiconductors used in the production of the highly specialized ASIC chips miners we rely on, and by increased labor costs to manufacture new miners as workforces and global supply chains continue to be affected by COVID-19 which hasand may further be impacted by global outbreaks of various epidemics or disease, ultimately leadleading to continually higher prices for new miners. Thus, until the global supply chain crisis is resolved, and these extraordinary pressures are alleviated, we expect to continue to incur higher than usual costs to obtain and deploy new miners, and we may face difficulties obtaining the new miners we need at prices or in quantities we find acceptable, if at all, and our business and results of operations may suffer as a result.
In addition, labor shortages resultingthat have persisted since the COVID-19 pandemic and those arising from the pandemicany new pandemics, epidemics or outbreaks of disease may lead to increased difficultylabor costs and labor costsdifficulty in hiring and retaining the highly qualified and motivated people we need to conduct our business and execute on our strategic growth initiatives. Sustaining our growth plans will require the ongoing readiness and solvency of our suppliers and vendors, a stable and motivated production workforce, and government cooperation, each of which may be affected by macroeconomic factors outside of our immediate control.
We cannot predict the duration or direction of current or new global trends or their sustained impact. Ultimately, we continue to monitor macroeconomic conditions to remain flexible and to optimize and evolve our business as appropriate, and we will have to accurately project demand and infrastructure requirements globally and deploy our workforce and capital resources accordingly. If we experience unfavorable global market conditions, or if we cannot or do not maintain operations at a scope that is commensurate with such conditions or are later required to or choose to suspend such operations again, our business, prospects, financial condition, and operating results may be harmed.
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We expect the cost of acquiring new miners to continue to be affected by the ongoing global supply chain crisis.
Similarly, the ongoing global supply chain crisis, coupled with increased demand for computer chips, has created a shortfall of semiconductors, resulting in challenges for the supply chain and production of the miners we employ in our Bitcoin miningMining operations. The miners are highly specialized servers built around ASIC chips, which very few manufacturers are able to produce in sufficient scale and quality to suit our operations. As a result, the cost to produce these miners has increased, whichand their manufacturers have passed on increased costs of production to purchasers like us. Therefore, until the global supply chain crisis is resolved, and these extraordinary pressures are alleviated, we expect to continue to incur higher than usual costs to obtain and deploy new miners, which could adversely affect our financial condition and results of operations.
We may not be able to timely complete our future strategic growth initiatives or within our anticipated cost estimates, if at all.
As part of our efforts to grow our hash rate and remain competitive in the market, we acquired thousands of new state-of-the-art miners from their manufacturer in 2020 and 2021,2022, which we have begunstarted to deploy at our WhinstoneRockdale Facility. To accommodate these new miners, we are expandingexpanded the WhinstoneRockdale Facility’s capacity to 700 MW of electrical power through the construction of four new 100 MW structures and the associated power and facilities infrastructure needed to operate them for industrial scaleindustrial-scale Bitcoin mining.Mining. Additionally, we are developing our Corsicana Facility, and we expect to complete Phase I in 2024. We will require additional new state-of-the-art miners to deploy at the Corsicana Facility as well as associated infrastructure development. Moreover, we have carried out this expansion duringthese expansions amid the ongoing global supply chain crisis and residual ongoing issues related to COVID-19, and our costs of supplies, labor, and material have increased as a result. While our present expansion project isprojects are proceeding on time as expected,track with expectations, we cannot guarantee we will complete this expansionthese expansions (or any future strategic growth initiatives) on time or within our cost estimates, if at all, due in part to the ongoing effects of the global supply chain crisis related to macroeconomic effects of COVID-19, increased inflation and changing conditions within the United States labor market. If we are unable to complete our planned expansionexpansions on schedule and within our anticipated cost estimates, our deployment of newly purchased miners may be delayed, which could affect our competitiveness and our results of operation, which could have a material adverse effect on our financial condition and the market price for our securities.
We may be unable to access sufficient additional capital for future strategic growth initiatives.
The expansion of our miner fleet and construction of our WhinstoneCorsicana Facility have beenare capital-intensive projects, and we anticipate that future strategic growth initiatives will likewise continue to be capital-intensive. We expect to raise additional capital to fund these and other future strategic growth initiatives; however, we may be unable to do so in a timely manner, in sufficient quantities, or on terms acceptable to us, if at all. If we are unable to raise the additional capital needed to execute theseour future strategic growth initiatives, we may be less competitive in our industry and ourthe results of our operations and financial condition may suffer, and the market price for our securities may be materially and adversely affected.
Expansion of our WhinstoneRockdale Facility and construction of our Corsicana Facility potentially exposes us to additional risks.
We arewere expanding and expect tomay continue to expand our WhinstoneRockdale Facility, and we are currently constructing our Corsicana Facility, which potentially exposes us to significant risks we may otherwise not be exposed to, including risks related to, among other sources: construction delays; lack of availability of parts and/or labor, increased prices as a result, in part, of inflation, and delays for data center equipment; labor disputes and work stoppages, including interruptions in work due to the ongoing COVID-19 pandemic;pandemics, epidemics, and other health risks; unanticipated environmental issues and geological problems; delays related to permitting and approvals to opencommence operations from public agencies and utility companies; and delays in site readiness leading to our failure to meet commitments made in connection with such expansion.
All construction relatedconstruction-related projects depend on the skill, experience, and attentiveness of our personnel throughout the design and construction process. Should a designer, general contractor, significant subcontractor or key supplier experience financial problemsdifficulties or other problems during the design or construction process, we could experience significant delays, increased costs to complete the project and/or other negative impacts to our expected returns.
If we are unable to overcome these risks and additional pressures to complete our expansion and construction projects in a timely manner, if at all, we may not realize their anticipated benefits, and our business and financial condition may suffer as a result.
Economic and geopolitical events may create increased uncertainty and price changes.
We are subject to price volatility and uncertainty due to geopolitical crises and economic downturns. Such geopolitical crises and global economic downturns may be a result of invasion, or possible invasion by one nation of another, leading to increased inflation
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and supply chain volatility. Such crises will likely continue to have an effect on our ability to do business in a cost-effective manner. Inflation has caused the price of materials to increase leading to increased expenses to our business. Global crises and economic downturns may also have the effect of discouraging investment in Bitcoin as investors shift their investments to less volatile assets. Such shifts could have a materially adverse effect on our business, operations and the value of the Bitcoin we mine or the institutional data center clients we host.
Failure to successfully integrate acquired businesses could negatively impact our balance sheet and results of operations.
Strategic acquisitions such as the Whinstone Acquisition and the ESS Metron Acquisition, both in 2021 (see Note 3. Acquisitions to our Consolidated Financial Statements for further information) are an important element of our growth strategy and the success of any acquisition we make depends in part on our ability to integrate the acquired business and realize anticipated synergies. Integrating acquired businesses may involve unforeseen difficulties, and may require a disproportionate amount of our management’s attention, and may require us to shiftreallocate our resources, financial and other resources.or otherwise.
For example, we may encounter challenges in the integration process such as: challenges and difficulties associated with managing the resulting larger and more complex company; conforming administrative and corporate structures and standards, controls, procedures and policies, business cultures, hiring and retention of key employees, and compensation and benefits structures, coordinating geographically dispersed operations; and our ability to deliver on our strategy going forward.
Further, our acquisitions may subject us to new liabilities and risks, some of which may be unknown. Although we and our advisors conduct due diligence on the operations of businesses we acquire, there can be no guarantee that we are aware of all liabilities of an acquired company. These liabilities, and any additional risks and uncertainties related to an acquired company not known to us or that we may deem immaterial or unlikely to occur at the time of the acquisition, could negatively impact our future business, financial condition, and results of operations.
We can give no assurance that we will ultimately be able to effectively integrate and manage the operations of any acquired business or realize anticipated synergies. The failure to successfully integrate the cultures, operating systems, procedures and information technologies of an acquired business could have a material adverse effect on our financial condition and results of operations.
We may experience increased compliance costs as a result of our strategic acquisitions.
The financial statements and internal controls of both Whinstone and ESS Metron have not, historically, been required to be in compliance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”). The accounting costs of bringing our subsidiaries’ financial records and internal controls in alignment with the Sarbanes-Oxley Act following these strategic acquisitions have been within our expectations; however, we may encounter unanticipated costs. Further, futureFuture strategic acquisitions could carry substantial compliance burdens, which may limit our ability to realize the anticipated benefits of such acquisitions, and which may require our management and personnel to shift their focus to such compliance burdens and away from their other functions. Such increased costs and compliance burdens could affect our ability to realize the anticipated benefits of such strategic acquisitions, and our business, results of operations, and financial condition may suffer as a result.
We have financed our strategic growth primarily by issuing new shares of our common stock in public offerings, which dilutes the ownership interests of our current stockholders, and which may adversely affect the market price of our securities.
We have raised capital to finance ourthe strategic growth of our business through public offerings of our common stock, and we expect to need to raise additional capital through similar public offerings to finance the completion of current and future expansion initiatives. We may not be able to obtain additional debt or equity financing on favorable terms, if at all, which could impair our growth and adversely impact our existing operations. In 2022 and 2023, a number of digital asset platforms and exchanges filed for bankruptcy and/or became the subjects of investigation by various governmental agencies for, among other things, fraud. These disruptions in the crypto asset market may impact our ability to obtain favorable financing. If we raise additional equity financing, our stockholders may experience significant dilution of their ownership interests, and the per share value of our common stock could decline. If we are unable to generate cash flows from operation sufficient to support our strategic growth, we may be required to adopt one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, or obtaining additional equity financing on terms that may be onerous or highly dilutive. Furthermore, if we engage in debt financing, the holders of any debt we issue would likely have priority over the holders of shares of our common stock in terms of order of payment preference. We may be required to accept terms that restrict our ability to incur additional indebtedness or take other actions including accepting terms that require us to maintain specified liquidity or other ratios that could otherwise not be in the interests of our stockholders.
We have a history of operating losses, and we may report additional operating losses in the future.
Our primary focus is on vertically integrating our Bitcoin mining,Mining, and we have recorded historical losses and negative cash flow from our operations when the value of Bitcoin we mine does not exceed our associated costs. Further, as part of our strategic growth plans, we have made capital investments in expanding and vertically integrating our Bitcoin Mining operations, including the
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expansion of our WhinstoneRockdale Facility, increasedand the ongoing construction of our Corsicana Facility, increasing our employee base, and incurredincurring additional costs associated with owning and operating a self-mining facility. However, future market prices of Bitcoin are difficult to predict, and we cannot guarantee that our future Bitcoin Mining revenue will exceed our associated costs.
The lack of regulation of digital asset exchanges which Bitcoin, and other cryptocurrencies, are traded on may expose us to the effects of negative publicity resulting from fraudulent actors in the cryptocurrency space and can adversely affect an investment in the Company.
The digital asset exchanges on which Bitcoin is traded are relatively new and largely unregulated. Many digital asset exchanges do not provide the public with significant information regarding their ownership structure, management teams, corporate practices, or regulatory compliance. As a result, the marketplace may lose confidence in, or may experience problems relating to, such digital asset exchanges, including prominent exchanges handling a significant portion of the volume of digital asset trading. In 2022 and 2023, a number of digital asset exchanges filed for bankruptcy proceedings and/or became the subjects of investigation by various governmental agencies for, among other things, fraud, causing a loss of confidence and an increase in negative publicity for the digital asset ecosystem. As a result, many digital asset markets, including the market for Bitcoin, have experienced increased price volatility. The Bitcoin ecosystem may continue to be negatively impacted and experience long term volatility if public confidence decreases.
These events are continuing to develop and it is not possible to predict, at this time, every risk that they may pose to us, our service providers, or the digital asset industry as a whole. A perceived lack of stability in the digital asset exchange market and the closure or temporary shutdown of digital asset exchanges due to business failure, hackers or malware, government-mandated regulation, or fraud may reduce confidence in digital asset networks and result in greater volatility in cryptocurrency values. These potential consequences of a digital asset exchange’s failure could adversely affect an investment in us.
We depend on attracting and retaining officers, managers, and skilled professionals.
Our success depends, in large part, on our ability to hire, retain and motivate talented officers, leadership, and professionals. We cannot guarantee that such employees will be retained which may inhibit our management functions, strategic development, and other critical functions. Our growth may be constrained by human capital resource limitations as we compete with other companies for skilled employees. We will need to take strategic action to develop our pool of management and skilled employees as well as grow such pool to meet the demands of our corporate functions. If we are not able to do so, our business, and thus our ability to grow, may be materially adversely affected.
Risks Related to the Price of Bitcoin
Our ability to achieve profitability is largely dependent on the price of Bitcoin, which has historically been volatile.
Our primary focus on vertically integrating our Bitcoin miningMining operations, and the associated expansion of our WhinstoneRockdale Facility, and the ongoing construction of our Corsicana Facility is largely based on our assumptions regarding the future value of Bitcoin, which has been subject to significant historical volatility and may be subject to influence from malicious actors, real or perceived scarcity, political, economic, and regulatory conditions, and speculation making its price more volatile or creating “bubble” type risks for the trading price of Bitcoin. Further, unlike traditional stock exchanges, which have listing requirements and vet issuers, requiring them to comply with rigorous listing standards and rules, and which monitor transactions for fraud and other improprieties, markets for Bitcoin and other cryptocurrencies tend to be underregulated, if they are regulated at all. LessIn general, less stringent cryptocurrency markets are perceived to have a higher risk of fraud or manipulation and any lack of oversight or perceived lack of transparency could reduce confidence in the price of Bitcoin and other cryptocurrencies, which could adversely affect the price of Bitcoin. As disclosed in Part I, Item 1. “Business” of this Annual Report, under the subheading “Regulatory,” Bitcoin and crypto asset markets generally may be subject to increased scrutiny and regulation by the U.S. legislature and government agencies, and such evolving regulatory and legal environment may impact our Bitcoin Mining and other activities.
These factors make it difficult to accurately predict the future market price of Bitcoin and may also inhibit consumer trust in, and market acceptance of, cryptocurrencies as a means of exchange, which could limit the future adoption of Bitcoin and, as a result, our assumptions could prove incorrect. If our assumptions prove incorrect and the future price of Bitcoin is not sufficiently high, our income from our Bitcoin miningMining operations may not exceed our costs, and our operations may never achieve profitability.
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Bitcoin market exposure to financially troubled cryptocurrency-related companies may impact our reputation, the price of Bitcoin and the profitability of our Bitcoin Mining operations.
The failure of several crypto platforms has impacted and may continue to impact the broader crypto economy; the full extent of these impacts may not yet be known. Bitcoin is subject to price volatility resulting from financial instability, poor business practices, and fraudulent activities of players in the broader cryptocurrency market. When investors in cryptocurrency and cryptocurrency-based companies experience financial difficulty as a result of price volatility, poor business practices, and/or fraud, it has caused, and may continue to cause, loss of confidence in the cryptocurrency space, reputational harm to cryptocurrency assets, heightened scrutiny by regulatory authorities and law makers, and a steep decline in the value of Bitcoin, among other material impacts. Such adverse effects have affected, and may in the future, affect the profitability of our Bitcoin Mining operations and our ability to obtain a profit from hosting institutional-scale data center clients.
Bitcoin is subject to halving, and our miningBitcoin Mining operations may generate less revenue as a result.
As disclosed in Part I, Item 1,1. “Business” of this Annual Report, under the subheading “Halving”,“Halving,” the number of new Bitcoin awarded for solving a block is cut in half – hence, “halving” – at mathematically predetermined intervals. The next halving for the Bitcoin blockchain is currently anticipated to occur in April 2024. While Bitcoin prices have historically increased around these halving events, there is no guarantee that the price change will be favorable or would compensate for the reduction in mining rewards. If a corresponding and proportionate increase in the price of the Bitcoin does not follow future halving events, the revenue we earn from our Bitcoin Mining operations would see a decrease, which could have a material adverse effect on our results of operations and financial condition.
Transaction fees may decrease demand for Bitcoin and prevent expansion.
As the number of BitcoinsBitcoin currency rewards awardedgranted for solving a block in athe Bitcoin blockchain has decreased, transaction fees have increasingly been used to incentivize miners to continue to contribute to the Bitcoin network. However, high Bitcoin transaction fees may slow the adoption of Bitcoin as a means of payment, which may decrease demand for Bitcoin and future prices of Bitcoin may suffer as a result. If Bitcoin prices are not sufficiently high, our Bitcoin Mining revenue may not exceed our associated costs, and our results of operations and financial condition may suffer. Further, because the price of shares of our common stock may be linked to the price of Bitcoin, if demand for Bitcoin decreases, causing future Bitcoin prices to decrease, the market price of our securities may be materially and adversely affected, limiting our ability to raise additional capital to fund our strategic growth plans.
Cryptocurrencies faceBitcoin faces significant scaling obstacles that can lead to high fees or slow transaction settlement times.
CryptocurrenciesBitcoin (and cryptocurrencies, generally) face significant scaling obstacles that can lead to high fees or slow transaction settlement times and attempts to increase the volume of transactions may not be effective. Scaling cryptocurrencies is essential to the widespread acceptance of cryptocurrencies as a means of payment, including Bitcoin. Many cryptocurrency networks face significant scaling challenges. For example, cryptocurrencies are limited with respect to how many transactions can occur per second. Participants in the cryptocurrency ecosystem debate potential approaches to increasing the average number of transactions per second that thea network can handle and have implemented mechanisms or are researching ways to increase scale, such as increasing the allowable sizes of blocks, and therefore the number of transactions per block, and sharding (a horizontal partition of data in a database or search engine), which would not require every single transaction to be included in every single miner’s or validator’s block. However, thereThere is, however, no guarantee that any of the mechanisms in place or being explored for increasing the scale of settlement of cryptocurrency transactions will be effective.
If adoption of Bitcoin (and cryptocurrencies, generally) as a means of payment does not occur on the schedule or scale we anticipate, the demand for Bitcoin may stagnate or decrease, which could adversely affect future Bitcoin prices, and our results of operations and financial condition, which could have a material adverse effect on the market price for our securities.
Risks Related to our Operations
To remain competitive in our industry, we seek to grow our hash rate to match the growing network hash rate and increasing network difficulty of the Bitcoin blockchain, and if we are unable to grow our hash rate at pace with the global network hash rate, our chance of earning Bitcoin from our Bitcoin Mining operations would decline.
As the adoption of Bitcoin has increased, the price of Bitcoin has generally appreciated, causing the demand for new Bitcoin rewards for successfully solving blocks on the Bitcoin blockchain to likewise increase. This has encouraged more miners to attempt to mine Bitcoin, which increases the global network hash rate deployed in support of the Bitcoin blockchain.
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Because a miner’s relative chance of successfully solving a block and earning a new Bitcoin reward is generally a function of the ratio the miner’s individual hash rate bears to the global network hash rate, as the global network hash rate increases, a miner must increase its individual hash rate to maintain its chances of earning new Bitcoin rewards. Therefore, as new miners enter the industry and as miners deploy greater and greater numbers of more and moreincreasingly powerful machines, existing miners must seek to continually increase their hash rate to remain competitive. Thus, a feedback loop is created: as Bitcoin gains popularity and its relative market price increases, more miners attempt to mine Bitcoin and the Bitcoin network hash rate is increased; in response, existing miners and new miners devote more and more hash rate to the Bitcoin blockchain by deploying greater numbers of increasingly powerful machines toin an attempt to ensure their ability to earn additional Bitcoin rewards does not decrease. Compounding this feedback loop, the network difficulty of the Bitcoin network (i.e., the amount of work (measured in hashes) necessary to solve a block) is periodically adjusted to maintain the pace of new block additions (with one new block added to the blockchain approximately every ten minutes), and thereby control the supply of Bitcoin. As miners deploy more hash rate and the Bitcoin network hash rate is increased, the Bitcoin network difficultdifficulty is adjusted upwards by requiring more hash rate to be deployed to solve a block. Thus, miners are further incentivized to grow their hash rate to maintain their chance of earning new Bitcoin rewards. In theory, these dual processes should continually replicate themselves until the supply of available Bitcoin is exhausted. In response, miners have attempted to achieve greater hash rate by deploying increasingly sophisticated miners and expensive miners in ever greater quantities. This has become the Bitcoin mining industry’s great “arms race.” Moreover, because there are very few manufacturers of miners capable of producing a sufficient number of miners of adequate quality to meet this need, scarcity results, leading to higher prices. Compounding this phenomenon, it has been observed that some manufacturers of Bitcoin miners may increase the prices for new miners as the market price of Bitcoin increases.
Accordingly, to maintain our chances of earning new Bitcoin rewards and remaining competitive in our industry, we must seek to continually add new miners to grow our hash rate at pace with the growth in the Bitcoin global network hash rate. However, as demand has increased and scarcity in the supply of new miners has resulted, the price of new miners has increased sharply, and we expect this process to continue in the future as demand for Bitcoin increases. Therefore, if the price of Bitcoin is not sufficiently high to allow us to fund our hash rate growth through new miner acquisitions and if we are otherwise unable to access additional capital to acquire these miners, our hash rate may stagnate and we may fall behind our competitors. If this happens, our chances of earning new Bitcoin rewards would decline and, as such, our results of operations and financial condition may suffer.
Because our miners are designed specifically to mine Bitcoin and may not be readily adaptable to mining other cryptocurrencies,uses, a sustained decline in Bitcoin’s value could adversely affect our business and results of operations.operations.
We have invested substantial capital in acquiring miners using ASIC chips designed specifically to mine Bitcoin and other cryptocurrencies using the SHA-256256-bit secure hashing algorithm (“SHA-256”) as efficiently and as rapidly as possible on our assumption that we will be able to use them to mine Bitcoin and generate revenue from our operations. Therefore, our Bitcoin Mining operations focus exclusively on mining Bitcoin, and our Bitcoin Mining revenue is based on the value of Bitcoin we mine. Accordingly, if the value of Bitcoin declines and fails to recover, for example, because of the development and acceptance of competing blockchain platforms or technologies, including competing cryptocurrencies which our miners may not be able to mine, the revenue we generate from our miningBitcoin Mining operations will likewise decline. Moreover, because our miners use these highly specialized ASIC chips, we may not be able to successfully repurpose them in a timely manner, if at all, if we decide to switch to mining a different cryptocurrency (or to another purpose altogether)other uses, following a sustained decline in Bitcoin’s value or if the Bitcoin is replaced by another cryptocurrency notblockchain stops using the SHA-256 algorithm.for solving blocks. This would result in a material adverse effect on our business and could potentially impact our ability to continue as a going concern.
Our reliance primarily on a single model of minerthird-party miners may subject our operations to increased risk of design flaws.
The performance and reliability of our miners and our technology is critical to our reputation and our operations. Because weWe currently only use Bitmain Technologies Limited (“Bitmain”) Antminer, and MicroBT WhatsMiner type miners, and if there are issues with those machines, such as a design flaw in the ASIC chips they employ, our entire system could be substantially affected. Further, we have encountered, and may in the future encounter, software and firmware complications associated with adapting our miners to operate in our immersion-cooled Bitcoin mining hardware, which may delay or otherwise limit the benefits we anticipate from our adoption of immersion-cooled Mining.mining. Any system error or failure may significantly delay response times or even cause our system to fail. Any disruption in our ability to continue mining could result in lower yields and harm our reputation and business. Any exploitable weakness, flaw, or error common to the Bitmain or MicroBT miners we currently utilize could affect allsubstantial portions of our miners; therefore, if a defect or other flaw exists and is exploited, a majority of, or all of our entire miner fleet could be adversely impacted. Any interruption, delay or system failure could result in financial losses, a decrease in the trading price of our common stock and damage to our reputation.
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Our reliance primarily on immersion-cooling exposes us to additional risks.
We are increasingly relying on immersion-cooling for our Bitcoin Mining infrastructure, to a large extent at the Rockdale Facility, and entirely (at this phase) at our Corsicana Facility. Immersion-cooling is an emerging technology in Bitcoin mining, which is not in wide-spread use, and has yet to be deployed at this scale. As such, there is a risk we may not succeed in deploying immersion-cooling at such a large scale to achieve sufficient cooling performance. All Bitcoin mining infrastructure, including immersion-cooling and air-cooling, is an evolving study. Cooling of Bitcoin miners in general is a risk to achieving full potential from our hash rate, especially in the State of Texas.
We require meaningful volumes of water to support cooling of our Bitcoin miners for both immersion-cooling and air-cooling operations. The inability to secure adequate water, or the loss of access to such required water, would impact our ability to sustain efficient mining operations.
Our use of third-party mining pools exposes us to additionalcertain risks.
We receive Bitcoin rewards from our mining activity through third-party mining pool operators. Mining pools allow miners to combine their processing power, increasing their chances of solving a block and getting paid by the network. The rewards are distributed by the pool operator, proportionally to our contribution to the pool’s overall mining power, after deducting the applicable pool fee, if any, used to solve a block on the Bitcoin blockchain. Should the pool operator’s system suffer downtime due to a cyber-attack, software malfunction or other issue, it willcould negatively impact our ability to mine and receive revenue. Furthermore,revenue, if we are dependent on the accuracy ofunable to quickly switch to another pool or to self-mine without a pool. Furthermore ,it is possible that the mining pool operator’s record keepingoperator could fail to accurately record the total processing power provided to the pool for a given Bitcoin mining application, in orderwhich would inhibit our ability to assessconfirm the proportion of that total processing power which we provided. While we have internal methods of tracking both the hash rate we provide and the total used by the pool, the mining pool operator uses its own record-keeping to determine our proportion of a given reward, which may not match our own. If we are unable to consistently obtain accurate proportionate rewards from our mining pool operators, we may experience reduced reward fornot receive accurate block rewards from the pool, with limited recourse to correct these inaccuracies. This could lead us to decide against further participation in a mining pool, or mining pools generally, which may affect the predictability of our efforts,mining returns, which wouldcould have an adverse effect on our business and operations.
We may not be able to realize the benefits of forks.
The Bitcoin blockchain is subject to modification based on a consensus of the users on its network. When a significant minority of users on the network agree to a modification that is not compatible with the prior network protocol, a “fork” of the network results, with one prong running the pre-modified protocol and the other running the modified protocol. The effect of such a fork would be the existence of two “versions” of the blockchain running in parallel that are not interchangeable, which requires exchange-type transactiontransactions to convert between the two forks. Additionally, it may be unclear following a fork which of the two protocols represents the original and which is the new protocol. Different metrics adopted by industry participants to determine which is the original asset following a fork in the Bitcoin blockchain may include: referring to the wishes of the core developers of a cryptocurrency; determining based on the blockchain with the greatest amount ofnetwork hash rate, contributed by miners or validators; or by reference to the “length” of blockchain (i.e.(i.e., the time between the first transaction recorded in the blockchain’s distributed ledger and the date of the most recent transaction). Accordingly, it is possible that a fork may occur on the Bitcoin blockchain that results in an asset different from our current Bitcoin holdings, or a protocol different from SHA-256 (which our miners are specifically designed to operate), gaining predominance, and the value of our Bitcoin assets may suffer, or we may not be able to adapt our miners to the new protocol. Therefore, we may not realize the economic benefit of a fork in the Bitcoin blockchain, either immediately or ever, which could adversely affect an investment in our securities.
Cyber-attacks, data breaches or malware may disrupt our operations and trigger significant liability for us, which could harm our operating results and financial condition, and damage our reputation or otherwise materially harm our business.
As a publicly traded company, we experience cyber-attacks, such as phishing, and other attempts to gain unauthorized access to our systems on a regular basis, and we anticipate continuing to be subject to such attempts. There is aan ongoing risk that some or all of our cryptocurrencies could be lost or stolen as a result of one or more of these incursions. As we increase in size, we may become a more appealing target of hackers, malware, cyber-attacks or other security threats, and, despite our implementation of strict security measures and frequent security audits, it is impossible to eliminate all such vulnerability. For instance, we may not be able to ensure the adequacy of the security measures employed by third parties, such as our service providers and Whinstone’s colocationany of our Data Center Hosting customers. Additionally, though we provide cybersecurity training for employees, we cannot guarantee that we will not be affected by further phishing attempts. Efforts to limit the ability of malicious actors to disrupt the operations of the internet or undermine our own security efforts may be costly to implement and may not be successful. Such breaches, whether attributable to a vulnerability in our systems or otherwise, could result in claims of liability against us, damage our reputation and materially harm our business.
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We rely on a well-known U.S. based third-party digital asset-focused custodian to safeguard our Bitcoin. If our third-party service provider experiences a security breach or cyber-attack and unauthorized parties obtain access to our Bitcoin, we may lose some or all of our Bitcoin and our financial condition and results of operations could be materially adversely affected.
To date, we have not to date experienced a material cyber-event;cyber incident; however, we continue to encounter ongoing cyber-attacks and the occurrence of any such event in the future could subject us to liability to our customers, suppliers, business partners and others, or give rise to legal and/or regulatory action, which could damage our reputation or otherwise materially harm our business, operating results, and financial condition.
Incorrect or fraudulent Bitcoin transactions may be irreversible and we could lose access to our Bitcoin.
Bitcoin transactions are not, from an administrative perspective, reversible without the consent and active participation of the recipient of the Bitcoin from the transaction. Because of the decentralized nature of the Bitcoin blockchain, once a transaction has been verified and recorded in a block that is added to the Bitcoin blockchain, an incorrect transfer of a Bitcoin or a theft thereof generally will not be reversible, and we may not have sufficient recourse to recover our losses from any such transfer or theft. It is possible that, through computer or human error, or through theft or criminal action, our cryptocurrencyBitcoin rewards could be transferred in incorrect amounts or to unauthorized third parties, or to uncontrolled accounts. Though recent high profile enforcement actions against individuals laundering stolen Bitcoin have demonstrated some means of bringing malicious actors to justice for their theft, the stolen Bitcoin is likely to remain unrecoverable. Furthermore, we must possess both the unique publicutilize a third-party custodian for our Bitcoin, and thus do not maintain a private keys to our digital wallets to gainkey. However, if they lose access to our Bitcoin, and the loss of a private key required may be irreversible. Therefore, if we lose,wallet, or if a malicious actor successfully denies usthe third-party custodian access to our private keys,wallet, we may be permanently denied access to the Bitcoin held in the wallet corresponding to the lost, stolen or blocked keys. Though we have taken and continue to take reasonable steps to secure our private keysdata and to store our Bitcoin with institutional custodians, if we, or our third-party custodian were to lose access to our private keys or otherwise experience data loss relating to our digital wallets, we could effectively lose access to and the ability to use our Bitcoin assets. Moreover, we may be unable to secure insurance policies for our Bitcoin assets at rates or on terms acceptable to us, if at all, and we may choose to self-insure. To the extent that we are unable to recover our losses from such action, error or theft, such events could have a material adverse effect on our business, results of operations and financial condition.
The Whinstone FacilityOur miners and mining infrastructure may not be adaptable to new technologies.
The market for data centers is characterized by rapidly changing technology, evolving industry and process standards, frequent new product introductions, and changing customer demands. Changes in industry practice or in technology could also reduce demand for the physical hosting space and infrastructure that we provide or make previous improvements in the WhinstoneRockdale Facility and Corsicana Facility obsolete. Our ability to deliver technologically sophisticated infrastructure at the WhinstoneRockdale Facility and Corsicana Facility, including power and cooling, is a significant factor in our customers’ decisions to collocate with us at the WhinstoneRockdale Facility. The Whinstone Facility’s infrastructure at the Rockdale Facility and Corsicana Facility may become obsolete due to the development of new systems that deliver power to, or eliminate heat from, the miners or other customer equipment that we house, which may require us to expend significant capital resources to retrofit or otherwise upgrade our current systems to compete with data centers deploying these new systems.
While we believe the WhinstoneRockdale Facility isand upcoming Corsicana Facility are primed to be adaptable, new technology can be, by its nature, unpredictable. Moreover, even if we are able to respond, we may not be able to efficiently upgrade or change these systems without incurring significant costs. Further, operationsOperations may be negatively impacted by these upgrades as they are in process. This may impact our customers’ experience in the short term, which may have a negative impact on our operating cash flows, liquidity, and financial condition.
The WhinstoneRockdale Facility is subject to a ten-yearlong-term ground lease, and if we are unable to renew its term, we may be unable to fully realize the anticipated benefits of our acquisition of Whinstone andits expansion if the ongoing development of the site.lease is not renewed or is otherwise terminated.
The WhinstoneRockdale Facility is subject to a ground lease with an initial term of ten years, followed by three ten-year renewal periods at our option, unless terminated earlier. The long-term success of our plans for the WhinstoneRockdale Facility is largely based on our ability to maintain the lease in effect and to renew it going forward. If we fail to maintain the lease or renew it once its initial term expires and the landlord requires Whinstonethe Rockdale Facility to vacate the premises, we will likely incur significant costs in relocating Whinstone’sits operations, if we could do so at all, and our Bitcoin Mining and Data Center Hosting operations would be interrupted during such relocation. Further, if we fail to renew the lease on terms favorable to us, and our costs are increased, then we may not realize the anticipated benefits of our investment in the Whinstone AcquisitionRockdale Facility or any future development of its remaining available capacity. Any disruptions or changes to Whinstone’sthe Rockdale Facility’s present relationship with the landlord for the Whinstone Facility could disrupt our business and our results of operations negatively.
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Our business could be harmed by prolonged power and internet outages, shortages, or capacity constraints.
Our operations require a significant amount of electrical power and access to high-speed internet to be successful. If we are unable to secure sufficient electrical power, or if we lose internet access for a prolonged period, we may be required to reduce our operations or cease them altogether. If this occurs, our business and results of operations may be materially and adversely affected.
We are subject to risks associated with our need for significant electrical power.
Our operations have required significant amounts of electrical power, and, as we continue to expand our mining fleet, operate our Rockdale Facility, and begin to operate our WhinstoneCorsicana Facility, we anticipate our demand for electrical power will continue to grow. The fluctuating price of electricity we require for our operations, and to power our expansion, may inhibit our profitability. If we are unable to continue to obtain sufficient electrical power on a cost-effective basis, we may not realize the anticipated benefits of our significant capital investments.
Additionally, our operations could be materially adversely affected by prolonged power outages. Although certain critical functions of our WhinstoneRockdale Facility may be powered by backup generators on a temporary basis, it would not be feasible or cost-effective to run miners on back-up power generators for extended periods of time. Therefore, we may have to reduce or cease our operations in the event of an extended power outage, or as a result of the unavailability or increased cost of electrical power. If this were to occur, our business and results of operations could be materially and adversely affected.
Our operations couldhave been, and may continue to be, adversely affected by events outside of our control, such as natural disasters.
We may be impacted by natural disasters, wars, health epidemics, weather conditions, the long-term effects of climate change, power outages or other events outside of our control. For example, we voluntarily halted operations at our WhinstoneRockdale Facility during the severe winter storms in the first quarter of 2022 and 2021 that had a widespread impact on utilities and transportation. Additionally, as previously disclosed, we sustained damage to the Rockdale Facility’s infrastructure during the severe winter storms affecting Texas in December 2022 which caused miners to be offline and impacted approximately 2.5 EH/s of our hash rate capacity. In the future, regulators or power providers may, under new or revised rules, require us to power down the WhinstoneRockdale Facility and/or the Corsicana Facility, once it begins operations, during such events. If major disasters such as earthquakes, floods or other climate-related events occur, the WhinstoneRockdale Facility, Corsicana Facility, or our other offices are severely damaged, or our information system or communications could break down or operate improperly, whichour operations may interrupt our operations.be interrupted. We may incur expenses or delays relating to such events outside of our control, which may not be covered by insurance, and such events could have a material adverse impact on our business, operating results and financial condition.
Increased scrutiny and changing expectations from stakeholders with respect to our ESGenvironmental, social, and governance (“ESG”) practices and the impacts of Climate Changeclimate change may result in additional costs or risks.
Companies across many industries are facing increasing scrutiny related to their environmental, social, and governance (“ESG”)ESG practices. Investor advocacy groups, certain institutional investors, investment funds and other influential investors are also increasingly focused on ESG practices and in recent years have placed increasing importance on the non-financial impacts of their investments. Furthermore, increased public awareness and concern regarding environmental risks, including global climate change, has resulted and may continue to result in increased public scrutiny of our business and our industry, and our management team may divert significant time and energy away from our operations and towards responding to such scrutiny and reassuring our employees.
The SEC has proposed rule changes that would require companies to include certain climate-related disclosures such as climate-related risks that are reasonably likely to have a material impact on business, results of operations, or financial conditions. Should such proposed rules be adopted, increased public scrutiny of our business may affect our operations, competitive position, and financial condition.
In addition, the physical risks of climate change may impact the availability and cost of materials and natural resources, sources and supply of energy, demand for Bitcoin and other cryptocurrencies, and could increase our insurance and other operating costs, including, potentially, to repair damage incurred as a result of extreme weather events or to renovate or retrofit facilities to better withstand extreme weather events. If environmental laws or regulations or industry standards are either changed or adopted and impose significant operational restrictions and compliance requirements on our operations, or if our operations are disrupted due to the physical impacts of climate change, our business, capital expenditures, results of operations, financial condition and competitive position could be negatively impacted.
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Risks Related to Governmental Regulation and Enforcement
Changing environmental regulation and public energy policy may expose our business to new risks.
Our Bitcoin miningMining operations require a substantial amount of power and can only be successful, and ultimately profitable, if the costs we incur, including for electricity, are lower than the revenue we generate from our operations. As a result, any mine we establish can only be successful if we can obtain sufficient electrical power for that mine on a cost-effective basis, and our establishment of new mines requires us to find locations where that is the case. For instance, our plans and strategic initiatives for the WhinstoneRockdale Facility and Corsicana Facility are based, in part, on our understanding of current environmental and energy regulations, policies, and initiatives enacted by federal and Texas regulators. If new regulations are imposed, or if existing regulations are modified, the assumptions we made underlying our plans and strategic initiatives may be inaccurate, and we may incur additional costs to adapt our planned business, if we are able to adapt at all, to such regulations.
In addition, there continues to be a lack of consistent climate legislation, which creates economic and regulatory uncertainty for our business because the cryptocurrencyBitcoin mining industry, with its high energy demand, may become a target for future environmental and energy regulation. New legislation and increased regulation regarding climate change could impose significant costs on us and our suppliers, including costs related to increased energy requirements, capital equipment, environmental monitoring and reporting, and other costs to comply with such regulations. Further, any future climate change regulations could also negatively impact our ability to compete with companies situated in areas not subject to such limitations. For example, legislation proposed
Moreover, in the stateState of New York, if passed, could restrictTexas, we currently participate in energy demand response programs to curtail operations, return capacity to the abilityelectrical grid, and receive funds to offset foregone operational revenue when necessary, such as in extreme weather events. Furthermore, we, as well as other Bitcoin miners operating primarily in the State of Texas, have recently received a mandatory survey from the U.S. Energy Information Administration (the “EIA”), seeking extensive information regarding our facilities’ use of electricity, suppliersand certain information regarding our operations, solely for the month of January 2024. It is possible that mandatory surveys such as this will be used by the EIA to provide electricitygenerate negative reports regarding the Bitcoin mining industry’s use of power and other resources, which could spur additional negative public sentiment and adverse legislative and regulatory action against us or the Bitcoin mining industry as a whole. Surveys and other regulatory actions could increase our cost of operations or otherwise make it more difficult for us to cryptocurrency mining operations in times of electricity shortage, oroperate at all.our current locations.
Given the political significance and uncertainty around the impact of climate change and how it should be addressed, and energy disclosure and use regulations, we cannot predict how legislation and regulation will affect our financial condition and results of operations.operations in the future in the United States and the State of Texas. Further, even without such regulation, increased awareness and any adverse publicity in the global marketplace about potential impacts on climate change or energy use by us or other companies in our industry could harm our reputation. Any of the foregoing could result in a material adverse effect on our business and financial condition.
The compliance costs of responding to new and changing regulationregulations could adversely affect our operations at our WhinstoneRockdale Facility and our future operations at our Corsicana Facility.
We (along with those from whom we purchase electricity) are subject to various federal, state, local, and international environmental laws and regulations, including those relating to the generation, storage, handling, and disposal of hazardous substances and wastes. Certain of these laws and regulations also impose joint and several liability, without regard to fault, for investigation and cleanup costs on current and former owners and operators of real property and persons who have disposed of or released hazardous substances into the environment. Our operations may involve the use of hazardous substances and materials, such as petroleum fuel for emergency generators, as well as batteries, cleaning solutions, and other materials.
Electricity costs could also be affected due to existing or new regulations on greenhouse gas emissions, whether such regulations apply to all consumers of electricity or just to specified uses, such as Bitcoin mining. These regulations may be federal, or we may be newly exposed to such regulations due to the acquisition ofour Texas-based Whinstone.operations. There has been interest in the U.S. Congressfederal government and in the Legislature of the Statestate government of Texas in addressing climate change, including through regulation of Bitcoin mining. Past legislativepolicy proposals to address climate change include measures ranging from taxes on carbon use or generation to energy consumption disclosure regimes to federally imposed limits on greenhouse gas emissions.emissions or energy use restrictions specific to Bitcoin mining. Further, although Texas has historically sought to maintain some degree of energy independence from the United States as a whole, it is unclear how future legislation and regulation will affect the WhinstoneRockdale Facility and the Corsicana Facility. The course of future legislation and regulation in the United States and in Texas remains difficult to predict, and potential increased costs associated with new legislation or regulation cannot be estimated at this time.
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Regulatory changes or actions may alter the nature of an investment in us or restrict the use of cryptocurrencies in a manner that adversely affects our business, prospects, or operations.
As cryptocurrencies have grown in both popularity and market size, governments around the world have reacted differently to cryptocurrencies; certain governments have deemed them illegal, and others have allowed their use and trade without restriction, while in some jurisdictions, such as in the U.S.,United States, subject the mining, ownership and exchange of cryptocurrencies to extensive, and in some cases overlapping, unclear and evolving regulatory requirements. Ongoing
For example, in January 2023, the Federal Reserve, Office of the Comptroller of the Currency, and FDIC issued a joint statement effectively discouraging banks from doing business with clients in crypto-asset industries, which could potentially create challenges regarding access to financial services. In January 2023, the Federal Reserve also issued a policy statement broadening its authority to cover state-chartered institutions. Moreover, in January 2023, the White House issued a statement cautioning deepening ties between crypto-assets and the broader financial system. Meanwhile, the SEC has announced several actions aimed at curtailing activities it deems sales of unregistered securities.
However, also during January 2023, the U.S. House of Representatives announced its first ever Financial Services Subcommittee on Digital Assets and the intention to develop a regulatory framework for the use and trade of digital assets and related financial services products in the United States. Bipartisan leadership of the Senate Banking Committee announced a similar objective.
Given the difficulty of predicting the outcomes of ongoing and future regulatory actions and legislative developments, it is possible that they could have a material adverse effect on our business, prospects or operations.
Our interactions with a blockchain may expose us to SDNspecially designated nationals (“SDN”) or blocked persons and new legislation or regulation could adversely impact our business or the market for cryptocurrencies.
The Office of Financial Assets Control (“OFAC”) of the U.S. Department of Treasury requires us to comply with its sanction program and not conduct business with persons named on its specially designated nationals (“SDN”)SDN list. However, because of the pseudonymous nature of blockchain transactions we may inadvertently and without our knowledge engage in transactions with persons named on OFAC’s SDN list. Our Company’s policy prohibits any transactions with such SDN individuals, and we take all commercially reasonable steps to avoid such transactions, but we may not be adequately capable of determining the ultimate identity of the individual with whom we transact with respect to selling cryptocurrencyBitcoin assets. Moreover, thethere is a risk that some bad actors will continue to attempt to use of cryptocurrencies, including Bitcoin, as a potential means of avoiding federally-imposedfederally imposed sanctions, such as those imposed in connection with the Russian invasion of Ukraine. For example, on March 2, 2022, a group of United States Senators sent the Secretary of the United States Treasury Department a letter asking Secretary Yellen to investigate its ability to enforce such sanctions vis-à-vis Bitcoin, and on March 8, 2022, President Biden announced an executive order on cryptocurrencies which seeks to establish a unified federal regulatory regime for cryptocurrencies.
We are unable to predict the nature or extent of new and proposed legislation and regulation affecting the cryptocurrencyBitcoin industry, or the potential impact of the use of cryptocurrenciesBitcoin by SDN or other blocked or sanctioned persons, which could have material adverse effects on our business and our industry more broadly. Further, we may be subject to investigation, administrative or court proceedings, and civil or criminal monetary fines and penalties as a result of any regulatory enforcement actions, all of which could harm our reputation and affect the value of our common stock.
Bitcoin and Bitcoin mining, as well as cryptocurrencies generally, may be made illegal in certain jurisdictions, including the ones we operate in, which could adversely affect our business prospects and operations.
Although we do not anticipate any material adverse regulations on Bitcoin mining in our jurisdictions of operation, itIt is possible that state or federal regulators may seek to impose harsh restrictions or total bans on cryptocurrencyBitcoin mining which may make it impossible for us to do business without relocating our mining operations, which could be very costly and time consuming. Further, although Bitcoin and Bitcoin mining, as well as cryptocurrencies generally, are largely unregulated in most countries (including the United States), regulators in certain jurisdictions maycould undertake new or intensify existing regulatory actions in the future that could severely restrict the right to mine, acquire, own, hold, sell, or use cryptocurrency or to exchange it for traditional fiat currency such as the United States Dollar. Such restrictions may adversely affect us as the large-scale use of cryptocurrenciesBitcoin as a means of exchange is presently confined to certain regions globally. Such circumstances could have a material adverse effect on us, which could have a material adverse effect on our business, prospects or operations and potentially the value of any Bitcoin or other cryptocurrencies we mine or otherwise acquire or hold for our own account, and thus harm investors.
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Risks Related to Ownership of Our Common Stock
The trading price of shares of our common stock has been subject to volatility.
The trading price of our common stock has been, and is likely to continue to be, volatile, and may be influenced by various factors including the risks, uncertainties and factors described in this Annual Report and our other filings with the SEC, as well as factors beyond our control or of which we may be unaware. If these risks come to pass and our business and results of operation suffer as a result, the market price of our securities may decline, which could have a material adverse effect on an investment in our securities..securities.
Bitcoin is subject to price volatility resulting from financial instability, poor business practices, fraudulent activities of players in the market, and other factors outside of our control. Such factors may cause a decline in the price of Bitcoin, which may affect the trading price of our shares of common stock.
We have issued new shares of our common stock, which has a dilutive effect.
We have, primarily, financed our strategic growth through our at-the-market (“ATM”) offerings and issuances of our common stock. Our ATM offerings allow us to raise capital as needed by tapping into the existing trading market for our shares by selling newly issued shares into the market depending on prevailing market prices. Our efforts to raise capital is for the purpose of executing on development plans and strategic growth opportunities as they arise; however, holders of our common stock may experience dilution as a result of our sales of newly issued shares of our common stock in such ATM offerings.
We have a classified board of directors; therefore, only approximately one-third of the Board is up for election at each annual shareholders’stockholders’ meeting, which could limit shareholders’stockholders’ ability to influence directors’ decision making.
Our Bylaws provide for a classified board of directors consisting of three classes of directors serving staggered three-year terms, and each year our stockholders elect one class of our directors. We believe that a classified board structure facilitates continuity and stability of leadership and policy by helping ensure that, at any given time, a majority of our directors have prior experience as directors of our Company and are familiar with our business and operations. In our view, this permits more effective long-term planning and helps create long-term value for our stockholders. The classified board structure, however, could prevent a party who acquires control of a majority of our outstanding voting stock from obtaining control of our board of directors until the second annual stockholders’ meeting following the date that party obtains control of a majority of our voting stock. The classified board structure may discourage a third party from initiating a proxy contest, making a tender offer or otherwise attempting to obtain control of us, as the structure makes it more difficult for a stockholder to replace a majority of our directors.
Article XIVX of our Bylaws, as amended, designates the courts of the State of New YorkNevada as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our shareholders,stockholders, and therefore may limit our shareholders’stockholders’ ability to choose a forum for disputes with us or our directors, officers, employees, or agents.
Article XIVX of our Bylaws, as amended, provides that, to the fullest extent permitted by law, and unless we consent to the selection of an alternative forum, the state and federal courts in and for the State of New YorkNevada shall be the sole and exclusive forum for the resolution of certain actions and proceedings that may be initiated by our stockholders, and that, by purchasing our securities, our stockholders are deemed to have notice of and consented to this forum selection clause. Under Article XIVX of our Bylaws, the following claims are subject to this forum selection clause: (a) any derivative action or proceeding brought on behalf of the Company; (b) any action or proceeding asserting a claim of breach of a fiduciary duty owed by any director or officer of the Company to the Company or the Company’s stockholders; (c) any action or proceeding asserting a claim against the Company arising pursuant to any provision of the Nevada Revised Statutes or the Company’s Articles of Incorporation or Bylaws (as either might be amended from time to time); or (d) any action or proceeding asserting a claim against the Company governed by the internal affairs doctrine.
By its terms, the forum selection clause in our Bylaws applies to the foregoing claims to the fullest extent permitted by law, and, as such, should not be interpreted as precluding our stockholders from bringing claims under the Exchange Act in the appropriate federal court with jurisdiction over such claims, as provided by Section 27or any other claim for which the federal courts of the Exchange Act. Likewise, the forum selection clause in our Bylaws should not be interpreted as precluding our stockholders from bringing claims under the Securities Act in the appropriate state or federal court with jurisdiction over such claims, as provided by Section 22 of the Securities Act.United States have exclusive jurisdiction.
We believe the choice-of-forum provision in our Bylaws will help provide for the orderly, efficient, and cost-effective resolution of legal issues affecting us by designating courts located in the State of New YorkNevada as the exclusive forum for cases involving such issues. However, this provision may limit a stockholder’s ability to bring a claim in a judicial forum that it believes to be favorable for disputes with us or our directors, officers, employees, or agents, which may discourage such actions against us and our directors, officers, employees, and agents.
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The Nevada revised statutes permit us to make this selection in our Bylaws, and, while there is no New York case law addressing the enforceability of this type of provision, New York courts have on prior occasion found persuasive authority in Delaware case law in favor of the enforceability of forum selection clauses in the absence of statutory or case law specifically addressing an issue of corporate law.Bylaws. However, if a court were to find the choice-of-forum provision in our Bylaws inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition, or results of operations.
Nevada law contains provisions that could discourage, delay or prevent a change in control of our company,Company, prevent attempts to replace or remove current management and reduce the market price of our stock.
Certain provisions of Nevada law described below may make us a less attractive candidate for acquisition, which may adversely impact the value of the shares of our capital stock held by our stockholders. We have not opted out of these provisions in our Bylaws, as permitted under the Nevada Revised Statutes.
Nevada Revised Statutes Sections 78.411 through 78.444 (the “Nevada Combinations Statute”) generally prohibit “combinations” including mergers, consolidations, sales and leases of assets, issuances of securities and similar transactions by a Nevada corporation having a requisite number of stockholders of record (of which we are one) with any person who beneficially owns (or any affiliate or associate of the corporation who within the previous two years owned), directly or indirectly, 10% or more of the voting power of the outstanding voting shares of the corporation (an “interested stockholder”), within two years after such person first became an interested stockholder unless (i) the board of directors of the corporation approved the combination or transaction by which the person first became an interested stockholder before the person first became an interested stockholder or (ii) the board of directors of the corporation has approved the combination in question and, at or after that time, such combination is approved at an annual or special meeting of the stockholders of the target corporation, and not by written consent, by the affirmative vote of holders of stock representing at least 60% of the outstanding voting power of the target corporation not beneficially owned by the interested stockholder or the affiliates or associates of the interested stockholder.
Two years after the date the person first became an interested stockholder, the Nevada Combinations Statute prohibits any combination with that interested stockholder unless (i) the board of directors of the corporation approved the combination or transaction by which the person first became an interested stockholder before the person first became an interested stockholder or (ii) such combination is approved by a majority of the outstanding voting power of the corporation not beneficially owned by the interested stockholder or any affiliate or associate of the interested stockholder. The Nevada Combinations Statute does not apply to combinations with an interested stockholder after the expiration of four years from when the person first became an interested stockholder.
Because we do not currently intend to pay any cash dividends on our common stock, our stockholders will not be able to receive a return on their shares unless they sell them.
We currently intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. Unless we pay dividends, our stockholders will not be able to receive a return on their shares unless they sell them. There is no assurance that stockholders will be able to sell shares when desired.
We and some of our current officers and directors, have been named as parties to various lawsuits arising out of, or related to, allegedly false and misleading statements made in prior securities filings, and those lawsuits could adversely affect us, require significant management time and attention, result in significant legal expenses or damages, and cause our business, financial condition, results of operations and cash flows to suffer.
A number of securities class action complaints and a stockholder derivative action have been filed against us and certain of our current officers and directors, as described more fully in Item 3, “Legal Proceedings”. Stockholders have filed three class action complaints against us in three states, accusing us of violations of the federal securities laws based on purported material misrepresentations or omissions allegedly made by the Company. Each class action complaint seeks unspecified money damages and other relief on behalf of a putative class of persons who purchased or otherwise acquired our common stock between November 13, 2017 and February 15, 2018. The stockholder derivative case alleges similar disclosure violations and seeks unspecified monetary damages and corporate governance reforms. If these matters cannot be resolved expeditiously, management’s attention may be diverted to this matter and there can be no assurance that the litigation would be settled. If the current litigation proceeds or if additional claims are filed, the legal and other costs associated with the defense of these actions and their ultimate outcomes could have a material adverse effect on our business, financial condition and results of operations. While we expect insurance to cover many of the costs associated with defending such litigation, including claims for indemnification made by our existing and former management team and members of our Board of Directors, insurance coverage may be insufficient and could require a diversion of our resources. There also may be adverse publicity associated with litigation that could negatively affect customer perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable.
Because there has been limited precedent set for financial accounting of Bitcoin and other cryptocurrency assets, the determination that we have made for how to account for cryptocurrency assets transactions may be subject to change.
Because there has been limited precedent set for the financial accounting of cryptocurrencies and related revenue recognition and no official guidance has yet been provided by the FASB or the SEC, it is unclear how companies may in the future be required to account for cryptocurrency transactions and assets and related revenue recognition. A change in regulatory or financial accounting standards could result in the necessity to change our accounting methods and restate our financial statements. Such a restatement could adversely affect the accounting for our newly mined cryptocurrency rewards and more generally negatively impact our business, prospects, financial condition and results of operations. Such circumstances would have a material adverse effect on our ability to continue as a going concern or to pursue our new strategy at all, which would have a material adverse effect on our business, prospects or operations as well as and potentially the value of any cryptocurrencies we hold or expects to acquire for our own account and harm investors.
We havepreviously identified material weaknesses in our internal control over financial reporting and may identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, any of which may result in material misstatements of our financial statements or cause us to fail to meet our periodic reporting obligations.
We are required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”).Act. Section 404 requires that we document and test our internal control over financial reporting and issue management’s assessment of our internal control over financial reporting. Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2021.2023. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Based on our assessment, as of December 31, 2021,2023, we concluded that our internal control over financial reporting contained no material weaknesses. ToHowever, to remediate thesepreviously identified material weaknesses, our management has been implementingpreviously implemented and continues to implement measures designed to ensure that control deficiencies contributing to the material weaknessweaknesses are remediated, such that these controls are designed, implemented, and operating effectively.
We believe that these actions will remediateremediated the material weakness.weaknesses. However, the remediation cannot be deemed successful until the applicable controls operate for a sufficient period of time and our management has concluded, through testing, that these controls
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are operating effectively. If we fail to comply with the requirements of Section 404 of the Sarbanes-Oxley Act, the accuracy and timeliness of the filing of our annual and quarterly reports may be materially adversely affected and could cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock. In addition, a material weakness in the effectiveness of our internal control over financial reporting could result in an increased chance of fraud and the loss of customers, reduce our ability to obtain financing and require additional expenditures to comply with these requirements, each of which could have a material adverse effect on our business, results of operations and financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS.COMMENTS
None.
ITEM 1C. Cybersecurity
We recognize the importance of assessing, identifying, and managing material risks associated with cybersecurity threats, as such term is defined in Item 106(a) of Regulation S-K. These material risks are managed across Riot, our subsidiaries, and third-party contractors, and monitoring such risks and threats is integrated into our overall risk management program. Our risk management program is comprised of, among other things, policies that are designed to identify, assess, manage, and mitigate cybersecurity risk, and is based on applicable laws and regulations, informed by industry standards and best practices.
We conduct risk assessments to evaluate the effectiveness of our systems and processes in addressing threats and to identify opportunities for enhancements. Additionally, we conduct privacy and cybersecurity reviews, as well as annual employee training, and monitor emerging laws and regulations related to information security and data protection. We utilize third party tools and techniques to test and enhance our security controls, perform annual cybersecurity framework assessments, conduct ongoing penetration testing of our systems, and benchmark against industry practices. Our internal audit function provides independent assessment on the overall operations of our cybersecurity program and the supporting frameworks.
In support of our risk management program, we have adopted an Information Security Policy (the “Info-Sec Policy”) and an Incident Response Plan (the “Response Plan”) that establish administrative, physical, and technical controls and procedures to protect the integrity, confidentiality, and accessibility of sensitive data that may exist throughout the Company as well as processes to assess, identify, manage, and report cybersecurity risks and incidents. Our Info-Sec Policy applies to all persons working for the Company, as well as any third parties working with Riot in any capacity. Violation of our Info-Sec Policy may result in revocation of access privileges, and disciplinary action up to and including termination of employment or service relations for third parties.
Our cybersecurity team analyzes all third-party vendors for compliance with our internal Info-Sec Policy in order to help us assess potential risks associated with their security controls. We also generally require third parties to, among other things, maintain security controls to protect our confidential information or data, and to notify us promptly, but in any case, no later than twenty-four (24) hours after the occurrence of any data breach or cybersecurity incident that may impact our data. After coordinating a response to any third-party cybersecurity incident, the incident response team reviews service providers’ compliance with the privacy and data security requirements of our Info-Sec Policy, obtains written assurance of corrective actions, as appropriate, and considers whether additional measures need to be taken to protect the Company.
Our cybersecurity team engages and utilizes third-party services as it monitors and actively responds to cybersecurity threats. We utilize an Endpoint Detection and Response (EDR) platform, an anti-virus application, through which incoming electronic communications are filtered, and an email security platform which seeks out identifiers in communications that disguise, impersonate, or otherwise misrepresent the source of the communication. Any such communications are then subject to quarantine or removal depending on the severity of issue. Additionally, we use a Security Information and Event Management (SIEM) system, which allows us to store logs off the system of record to prevent log tampering and provides the cybersecurity team functionality to build alerts on specific use cases that are important and unique to our business. If our applications fail or our software does not successfully block a malicious electronic communication, employees are required to notify an immediate supervisor or the cybersecurity team promptly, but in no circumstances later than twenty-four (24) hours after such occurrence.
Our board of directors has ultimate oversight of our strategic and business risk management and, as such, has oversight responsibilities for risks and incidents relating to cybersecurity threats, including compliance with disclosure requirements, cooperation with law enforcement, and related effects on financial and other risks. Management is responsible for identifying, assessing, and managing material cybersecurity risks on an ongoing basis, establishing and updating processes to ensure such potential risks are monitored, putting in place appropriate mitigation measures, and providing regular reports on cybersecurity trends and risks, and should they arise, any material incidents with our board of directors.
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Our Chief Financial Officer is responsible for our cybersecurity program, and our Manager of Cybersecurity is our incident response team leader. In this position, our Manager of Cybersecurity oversees our cybersecurity team, and guides our incident response team, which is comprised of members from across our organization, including cybersecurity, IT support, mining operations, software engineering, compliance and legal, as well as contractors and other partners, as they support our cybersecurity functions. Our Manager of Cybersecurity has nearly two decades of experience in cybersecurity management and policy, achieved through job training, higher education, and military experience, and possesses a background in security and alignment of information technology solutions.
Our Response Plan, developed by management and our cybersecurity team, and IT support team, serves as a Company-wide guide to facilitate coordinated, prompt, and systematic responses to any cybersecurity incidents and utilizes four interconnecting phases: (1) Preparation; (2) Detection and Analysis; (3) Containment, Eradication, and Recovery; and (4) Post-Incident Activity.
Upon detection of a cybersecurity incident and initial intake and validation by our cybersecurity team, our incident response team triages and evaluates the cybersecurity incident, and, depending on the severity, escalates the incident to management and a cross-functional working group. Any incident assessed as potentially being or potentially becoming material is immediately escalated for further assessment and reported to executive management. Determination of what resources are needed to address the incident, prioritizing of response activities, forming of action plans, and notification of external parties as needed are then undertaken by executive management and the cross-functional working group, led by our Chief Financial Officer and Manager of Cybersecurity. We consult with outside counsel as appropriate, including on materiality analysis and disclosure matters, and our executive management makes the final materiality and disclosure determinations, among other compliance decisions.
In 2023, we did not identify any cybersecurity threats that have materially affected or are reasonably likely to materially affect our business strategy, results of operations or financial condition. However, despite our efforts, we may not be successful in eliminating all risks from cybersecurity threats and can provide no assurances that undetected cybersecurity incidents have not occurred. See Part I, Item 1A. “Risk Factors” of this Annual Report for more information regarding the cybersecurity risks we face.
ITEM 2. PROPERTIES.PROPERTIES
LeasesLeased Property
As of December 31, 2021,2023, we leased all of our locations, including ourvarious corporate offices, in Castle Rock, Colorado, Austin, Texas and Costa Mesa, California, ESS Metron’s corporate offices and manufacturing facilities in Denver, Colorado andused for our WhinstoneEngineering segment, temporary office space at our Corsicana Facility, in Rockdale, Texas, which is subject toused for our Bitcoin Mining segment, and had a long-term ground lease. Atlease for the land upon which the Rockdale Facility is constructed, which is used for our Bitcoin Mining and Data Center Hosting segments.
Property Owned
As of December 31, 2020,2023, we did notowned the Rockdale Facility and the land upon which the Corsicana Facility is being constructed. We will own the Corsicana Facility once it is constructed.
In our opinion, our facilities, whether owned or leased, are suitable and adequate for their intended purposes, are well-maintained and generally in regular use and have any significant operatingcapacities adequate for current and projected needs. Other than the ground lease balances.
See Note 11, “Leases” tofor the notes to our Consolidated Financial Statements in Part II, Item 8. “Financial Statements and Supplementary Data” beginningRockdale Facility noted above, there are no material encumbrances on page 53 of this Annual Report for further discussionany of our accounting policies relating to our leased premises.owned facilities.
Management believes its leased facilities are adequate for the Company’s near-term needs.
ITEM 3. LEGAL PROCEEDINGS.PROCEEDINGS
We,For a discussion of our legal proceedings, see Note 17. Commitments and our subsidiaries, are subject at times to various claims, lawsuits and governmental proceedings relatingContingencies to our business and transactions arising in the ordinary course of business. We cannot predict the final outcome of such proceedings. Where appropriate, we vigorously defend 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 our insurance program. We maintain property, and various types of liability insurance in an effort to protect ourselves from such claims. In terms of any matters where there is no insurance coverage available to us, or where coverage is available and we maintain a retention or deductible associated with such insurance, we 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 us 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 we disclose the range of possible loss. Paid expenses related to the defense of such claims are recorded by us as incurred and paid and included CECL. 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 our defense of such matters. On the basis of current information, we do not believe there is a reasonable possibility that, other than with regard to the Class Action described below, any material loss, if any, will result from any claims, lawsuits and proceedings to which we are subject to either individually, or in the aggregate.Consolidated Financial Statements.
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. The complaint asserts 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 complaint alleges 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 complaint requests damages in unspecified amounts, costs and fees of bringing the action, and other unspecified relief.
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 complaint contained substantially similar allegations and the same claims as those filed by Mr. Takata, and requests 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. The court also appointed Dr. Golovac as Lead Plaintiff and Motely Rice as Lead Counsel of the consolidated class action.
Lead Plaintiff filed a consolidated complaint on January 15, 2019. Defendants filed motions to dismiss on March 18, 2019. In lieu of opposing defendants’ motions to dismiss, Lead Plaintiff filed another amended complaint on May 9, 2019. Defendants filed multiple motions to dismiss the amended complaint starting on September 3, 2019.
On April 30, 2020, the court granted the motions to dismiss, which resulted in the dismissal of all claims without prejudice. On December 24, 2020, Lead Plaintiff filed another amended complaint. Defendants filed multiple motions to dismiss the amended complaint starting on February 8, 2021, which were fully briefed. On February 28, 2022, the court issued an order instructing the parties to submit supplemental briefing by March 14, 2022 on particular issues raised in the motions to dismiss. Because this litigation is still at this early stage, we cannot reasonably estimate the likelihood of an unfavorable outcome or the magnitude of such an outcome, if any.
Shareholder Derivative Cases
On April 5, 2018, Michael Jackson filed a shareholder derivative complaint on behalf of the Company in the Supreme Court of the State of New York, County of Nassau, against certain of the Company’s officers and directors, as well as against an investor (Jackson v. Riot Blockchain, Inc., et al., Case No. 604520/18). The complaint contains similar allegations to those contained in the shareholder class action complaints and seeks recovery for alleged breaches of fiduciary duty, unjust enrichment, waste of corporate assets, abuse of control and gross mismanagement. The complaint seeks unspecified monetary damages and corporate governance changes. At the last preliminary conference, the court adjourned the conference until August 10, 2021 in lieu of staying the action. Defendants do not anticipate any other activity on this case until the next preliminary conference.
On May 22, 2018, two additional shareholder derivative complaints were filed on behalf of the Company in the Eighth Judicial District Court of the State of Nevada in and for the County of Clark (Kish v. O’Rourke, et al., Case No. A-18-774890-B & Gaft v. O’Rourke, et al., Case No. A-18-774896-8). The two complaints make identical allegations, which are similar to the allegations contained in the shareholder class action complaints. The shareholder derivative plaintiffs also seek recovery for alleged breaches of fiduciary duty, unjust enrichment, waste of corporate assets, and aiding abetting a breach of fiduciary duty. The complaints seek unspecific monetary damages and corporate governance changes.
On September 24, 2018, the court entered an order consolidating the Gaft and Kish actions, which is now styled as In re Riot Blockchain, Inc. Shareholder Derivative Litigation, Case No. A-18-774890-B. The plaintiffs filed a consolidated complaint on March 15, 2019. The consolidated action has been temporarily stayed until the resolution of the motion(s) to dismiss in the securities class action pending in the United District Court for the District of New Jersey.
On October 9, 2018, another shareholder derivative complaint was filed on behalf of the Company in the United District Court for the Eastern District of New York (Rotkowitz v. O’Rourke, et al., Case No. 2:18-cv-05632). As with the other shareholder derivative actions, the shareholder plaintiff alleges breach of fiduciary duty, waste of corporate assets, and unjust enrichment against certain of the Company’s officers, directors, and an investor. The complaint’s allegations are substantially similar to those made in the other securities class action and shareholder derivative complaints filed in 2018. The complaint seeks unspecific monetary damages and corporate governance changes. The parties filed a motion with the court to temporarily stay this action until the resolution of the motion(s) to dismiss in the securities class action pending in the United District Court for the District of New Jersey. In response, the court dismissed the action without prejudice with leave to refile a complaint following the resolution of the motion(s) to dismiss in the securities class action pending in the United District Court for the District of New Jersey.
On October 22, 2018, another shareholder derivative complaint was filed on behalf of the Company in the United District Court for the Southern District of New York (Finitz v. O’Rourke, et al., Case No. 1:18-cv-09640). The shareholder plaintiffs allege breach of fiduciary duty, waste of corporate assets, and unjust enrichment against certain of the Company’s officers, directors, and an investor. The complaint’s allegations are substantially similar to those made in the other securities class action and shareholder derivative complaints filed in 2018. The complaint seeks unspecific monetary damages and corporate governance changes. Upon the parties’ stipulation, the court issued an order temporarily staying this action until the resolution of the motion(s) to dismiss in the securities class action pending in the United District Court for the District of New Jersey.
On December 13, 2018, another shareholder derivative complaint was filed on behalf of the Company in the United District Court for the Northern District of New York (Monts v. O’Rourke, et al., Case No. 1:18-cv-01443). The shareholder plaintiffs allege claims for violation of Section 14(a) of the Securities Exchange Act of 1934, breach of fiduciary duties, unjust enrichment, waste of corporate assets, and aiding and abetting against certain of the Company’s officers, directors, and an investor. The complaint’s allegations are substantially similar to those made in the other securities class action and shareholder derivative complaints filed in 2018. The complaint seeks unspecific monetary damages and corporate governance changes. Upon the parties’ stipulation, the court issued an order temporarily staying this action until the resolution of the motion(s) to dismiss in the securities class action pending in the United District Court for the District of New Jersey.
Defendants intend to vigorously contest plaintiffs’ allegations in the shareholder derivative actions and plaintiffs’ right to bring the action in the name of Riot Blockchain. But because this litigation is still at this early stage, we cannot reasonably estimate the likelihood of an unfavorable outcome or the magnitude of such an outcome, if any.
ITEM 4. MINE SAFETY DISCLOSURES.DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.
SECURITIES
Market Information
Our common stock trades on the Nasdaq Capital Market under the symbol “RIOT”.
Holders of our Common Stock
As of March 8, 2022,February 20, 2024, there were approximately 8411,815 holders of record of our common stock. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees.
Dividend Policy
We have historically not declared or paid cash dividends on our capital stock. Any future determination regarding the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects, and other factors our board of directors may deem relevant.
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Stock Performance Graph
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or incorporated by reference into any filing of Riot Blockchain,Platforms, Inc. under the Securities Act, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
The following graph shows a comparison over a five-year period from January 1, 2017December 31, 2018 through December 31, 2021,2023, of the cumulative total return on (a) our common stock (RIOT), (b) our self-constructed Peer Group Index, (c) the NasdaqRUSSELL 3000 Index (“RUSSELL 3000”), (d) the NASDAQ Composite Index (“NASDAQ Composite”), and (e) the RussellRUSSELL 2000 Index. Due toIndex (“RUSSELL 2000”), assuming an aggregate initial investment in each of $100 on December 31, 2018 (and weighted based on the infancymarket cap of our industry, we have not compared our performance against a self-constructedeach peer group or used a Published Industry Index.in the Peer Group Index as of December 31, 2018), including reinvestments of any dividends. Such returns are based on historical results and are not intended to suggest future performance. Data for the Nasdaq Composite Index and the Russell 2000 Index assumes an investment of $100 on December 31, 2016 and reinvestment of dividends. WeHistorically, we have historically not declared or paid cash dividends on our common stock.
For the year ended December 31, 2023, the Company elected to change the relative benchmark groups from NASDAQ Composite and RUSSELL 2000, to a self-constructed Peer Group Index, and RUSSELL 3000. Management believes that the self-constructed Peer Group Index includes companies that are more aligned with Riot than NASDAQ Composite, which was previously used due to the infancy of the industry and the lack of an established peer group. Additionally, the change from RUSSELL 2000 to RUSSELL 3000 reflects the Company’s decision to utilize RUSSELL 3000 to determine our stock’s relative performance under the Company’s 2019 Equity Incentive Plan, as amended (the “2019 Equity Incentive Plan”). During the year ended December 31, 2023, we established a peer group as disclosed in our definitive proxy statement for our 2023 annual meeting of stockholders (the “2023 Proxy Statement”).
Our self-constructed Peer Group Index consists of the members of our peer group with available publicly traded market data as of, and subsequent to, December 31, 2018, and consists of: Marathon Digital Holdings, Inc. (MARA), Hut 8 Corp. (HUT), CleanSpark, Inc. (CLSK), HIVE Digital Technologies, Ltd. (HIVE), Bit Digital, Inc. (BTBT), TeraWulf Inc. (WULF), and Mawson Infrastructure Group, Inc. (MIGI).
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Issuer Purchases of Securities
During the three months ended December 31, 2023, certain of our employees surrendered shares of common stock awarded to them to satisfy statutory minimum federal and state tax obligations associated with the vesting of restricted stock awards issued under our 2019 Equity Incentive Plan. The following table summarizes these repurchases:
| | | | | | | | | |
| | |
| | |
| Total Number |
| Maximum |
| | | | | | | of Shares | | Number of |
| | | | | | | Purchased as | | Shares that |
| | Total | | | | | Part of | | May Yet Be |
| | Number of | | Average | | Publicly | | Purchased | |
| | Shares | | Price Paid | | Announced Plans | | Under the Plans | |
Period | | Purchased | | per Share (a) | | or Programs | | or Programs | |
October 1, 2023 through October 31, 2023 | | 2,098 | | $ | 9.15 | | N/A | | N/A |
November 1, 2023 through November 30, 2023 | | 7,034 | | | 10.68 | | N/A | | N/A |
December 1, 2023 through December 31, 2023 | | 1,335 | | | 15.66 | | N/A | | N/A |
Total | | 10,467 | | $ | 11.01 | |
| |
|
(a) | The price paid per share is based on the closing price of our common stock as of the date of the determination of the statutory minimum for federal and state tax obligations. |
Recent Sales of Unregistered Securities
On December 1, 2021, we issued 715,413 shares of our common stock, subject to a holdback of 70,165 shares to the sellers in connection with the ESS Metron Acquisition. The shares of common stock in connection with the ESS Metron Acquisition were issued in reliance upon an exemption from registration provided by Section 4(a)(2) of the Securities Act. Subsequently, we registered for resale the 645,248 shares issued to the sellers at the closing of the ESS Metron Acquisition.Acquisition and the 70,165 shares to the sellers upon expiration of the holdback period during 2023.
On May 26, 2021, at the closing of the Whinstone Acquisition, we issued 11.8 million shares of our common stock to Northern Data in exchange for all of the issued and outstanding equity interests of Whinstone.Whinstone US, Inc. (“Whinstone”). These shares were issued in reliance upon an exemption from registration provided by Section 4(a)(2) of the Securities Act. Subsequently, we registered the shares issued to Northern Data for resale pursuant to registration rights granted under the shareholders’ agreement we entered into with Northern Data in connection with closing of the Whinstone Acquisition.
ITEM 6. [RESERVED]
Not applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to helpprovides information that will assist the reader understandin understanding our results of operations and financial condition. TheThis MD&A is provided as a supplement to, and should be read in conjunction with our consolidated financial statements and notes thereto included in Item 8 -Consolidated Financial Statements and the related notes that are included in Part II, Item 8. “Financial Statements and Supplementary Data.Data” of this Annual Report.
TheThis MD&A generally discusses 20212023 and 20202022 items and year-to-year comparisons between 20212023 and 2020, as well as year-to-year discussions between 2021, 2020, and 2019, where indicated.2022. Discussions of 20192021 items and year-to-year comparisons between 20202022 and 2019 that2021 are not included, in this Form 10-K/Aand can be found in “Management’s Discussion and Analysis of Financial Condition and Results orof Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with2022.
Forward Looking Statements
This MD&A includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Actual results and the SEC on March 31, 2021.timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. See “Cautionary Note Regarding Forward-Looking Statements.”
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Business Overview:
Overview and 2023 Highlights
We are a vertically integrated Bitcoin mining and cryptocurrency infrastructure development company principally engaged in enhancing our capabilities to mine Bitcoin.Bitcoin in support of the Bitcoin blockchain. We also provide thecomprehensive and critical mining infrastructure for our institutional scaleinstitutional-scale hosted clients to mine Bitcoin at our Rockdale Facility. The Rockdale Facility currently provides 700 MW in total developed capacity for our Bitcoin mining facility (the “Whinstone Facility”).and data center hosting services for institutional-scale hosted clients. Our WhinstoneRockdale Facility is believed to be the largest Bitcoin mining facility in North America, as measured by developed capacity. Additionally, we are developing the Corsicana Facility, a second large-scale Bitcoin mining data center facility, which, upon completion, is expected to have approximately one gigawatt of capacity available for our own Bitcoin mining and data center hosting services for institutional-scale hosted clients. During 2023, Riot continued to expand on our growth-focused corporate strategy by capitalizing on our positioning within the market, and appropriately allocating resources to continue to expand and develop in North America.a volatile market.
We operate in an environment which is consistently evolvingfrequently evolves based on the proliferation of Bitcoin and cryptocurrencies in general. A significant component of our strategy is to effectively and efficiently allocate capital between opportunities that generate the highest return on capital.our investment.
Bitcoin Mining
We operate in three business segments: (1) Bitcoin Mining (“Mining”), (2) Data Center Hosting (“Hosting”),own and (3) Electrical Products and Engineering (“Engineering”).
Strategic Acquisitions
Whinstone
On May 26, 2021, we completed the acquisition of all of the issued and outstanding equity interests in Whinstone US, Inc. (“Whinstone”) pursuant to the stock purchase agreement, dated as of April 8, 2021, we entered into with Northern Data AG (“Northern Data”) and Whinstone (the “Whinstone Acquisition”). At the closing of the Whinstone Acquisition, we paid to Northern Data $80 million in cash, subject to customary adjustments set forth in the stock purchase agreement, and issued to Northern Data 11.8 million shares of our common stock. We also entered into a shareholder agreement with Northern Data on the closing date granting Northern Data certain registration rights whereby we registered the 11.8 million shares issued to Northern Data as part of the Whinstone Acquisition. Subsequent to December 31, 2021, there were no registration rights obligations to Northern Data.
After closing the Whinstone Acquisition, we announced a large-scale expansion of the Whinstone Facility by 400 MW, which is anticipated to bring the Whinstone Facility to 700 MW in total capacity of Bitcoin mining infrastructure. The expansion of the Whinstone Facility will provide us with the necessary infrastructure to operate our miners efficiently, and deploy our future miners, as well as provide additional expansion opportunities in our Hosting business.
ESS Metron
On December 1, 2021, we entered into a membership interest purchase agreement to acquire all of the issued and outstanding equity interests (the “ESS Metron Acquisition”) of Ferrie Franzmann Industries, LLC (d/b/a ESS Metron) (“ESS Metron”). At the closing of the ESS Metron Acquisition, we issued to the sellers $25 million in cash, subject to customary adjustments set forth in the membership interest purchase agreement, and 715,413 shares of our common stock, subject to a holdback of 70,165 shares as security for the sellers’ indemnification obligations under the membership interest purchase agreement. We also granted the sellers certain registration rights relating to the resale by the sellers of the shares issued to them under the membership interest purchase agreement, among other things. Pursuant to these registration rights, we registered the resale of the 645,248 shares issued to the sellers at the closing of the ESS Metron Acquisition pursuant to the prospectus supplement we filed with the SEC on December 1, 2021 under our effective Registration Statement on Form S-3 filed with the SEC on August 31, 2021 (File No. 333-259212). These registration rights also apply to the 70,165 holdback shares withheld at closing of the ESS Metron Acquisition, subject to the satisfaction of the conditions to their release, as set forth in the membership interest purchase agreement. Accordingly, as provided in the membership interest purchase agreement, we will be obligated to register under the Securities Act the resale of the holdback shares that are ultimately issued to the sellers.
ESS Metron is one of the world’s leading designerslargest Bitcoin Mining operations in North America. During the year ended December 31, 2023, we continued to deploy miners at our Rockdale Facility and manufacturerscontinued development activities at the Corsicana Facility, with the objective of power distribution equipment. The acquisition of ESS Metron provides critical infrastructure electrical componentsincreasing our operational efficiency and engineering expertise to facilitate the expansion of our Whinstone Facility, as well as future strategic growth initiatives we may undertake. ESS Metron has also been instrumentalperformance in the design, manufacture, and implementationfuture.
As of our industrial-scale immersion-cooled Bitcoin mining hardware at our Whinstone Facility.
2022 Trends
We anticipate that 2022 will be a year of consolidation in the Bitcoin mining industry, and we believe that, given our relative position 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 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 this Annual Report for additional discussion regarding potential impacts our competitive and evolving industry may have on our business.
Bitcoin Mining
At December 31, 2021,2023, our Bitcoin Mining business segment operated approximately 30,907 ASIC112,944 miners, with a hash rate capacity of 3.1 exahash per second (“12.4 EH/s”), utilizing approximately 96 megawatts (“MW”) of capacity. In 2021,s.
During the year ended December 31, 2023, we mined 3,8126,626 Bitcoin, which represented an increase of 269%19.3% over the 1,0335,554 Bitcoin we mined in 2020. Based on our existing operations and expected deliveriesthe year ended December 31, 2022. We anticipate achieving a total self-mining hash rate capacity of miners pursuant to our purchase orders with their manufacturer, Bitmain, we anticipate we will have approximately 120,150 miners in operation, utilizing approximately 370 MW of capacity28 EH/s by the end of 2022.2024.
Miner Purchases and Deployments
AtDuring the year ended December 31, 2021,2023, we had purchased, received and/or deployedentered into the following miners:
During 2021, we received 34,608 additional Antminer model S19-Pro miners pursuant to purchase orders with their manufacturer, Bitmain, and, as of December 31, 2021, we had deployed a total of 30,907 miners in our Mining operation. Additionally, we executed six additional purchase orders with BitmainMaster Agreement to acquire 43,500 Antminer99,840 miners from MicroBT (consisting of 8,320 M56S+ model S19j (90 Terahash per second) (“TH/s”))miners, 22,684 M56S++ model miners, 20,778 M66 model miners, and 9,000 Antminer48,058 M66S model S19j-Pro (100 TH/s) miners, and 30,000 of Bitmain’s latest generation Antminer model S19XP (140 TH/s) miners,miners), primarily for use at the Corsicana Facility, for a combined total purchase price of approximately $535.0$453.4 million. Pursuant to these agreements, approximately $301.3 million remains payable to Bitmain in installments in advance of shipmentDelivery of the miners which is scheduledbegan in the fourth quarter of 2023, with all miners expected to occurbe received and deployed by mid-2025. Upon full deployment of the 99,840 miners, we anticipate a total self-mining hash rate capacity of 38 EH/s. The Master Agreement also provides us with an option to purchase up to an additional 265,000 additional miners, on a monthly basis throughthe same terms as the initial order.
For the year ended December 2022.31, 2023, Bitcoin Mining revenue was approximately $189.0 million.
Data Center Hosting
Upon completionFollowing our acquisition of the Whinstone, Acquisition, we commenced an expansion of our WhinstoneRockdale Facility to 700 MW, frommore than double its existing 300 MWdeveloped capacity at the time of developed capacity. We expect the expanded Whinstone Facility to be completed during 2022, including the constructionacquisition and, as of four new dedicated Bitcoin mining buildings totaling approximately 240,000 square feet of finished hosting space. Upon completion, we anticipate our Whinstone Facility will possess sufficient developed electricity power capacity to support an estimated 112,000 Antminer model S19j miners based upon current configurations. We believe theDecember 31, 2023, this expansion had been completed.
The expansion of our WhinstoneRockdale Facility will provide sufficienthas provided capacity to enable us to deploy a significant quantity of our miners (including our current deployed fleet and those expected to be delivered in future shipments pursuant to our purchase orders with Bitmain)of miners in a self-hosted facility, while allowing Whinstoneus to continue to operate and grow its existingoffering our Data Center Hosting business.services. We believe deploying our miners at the expanded WhinstoneRockdale Facility hasoffers many advantages for our miningBitcoin Mining operations, including allowing us to operate our miners without incurring third-party colocation services fees and to do so at the low fixed low energy costs available to the WhinstoneRockdale Facility under its long-term power supply agreement. We also anticipate this expansion of the Whinstone Facility will provide space for third-party miner colocation services and for other enterprise-level data center hosting services.PPA.
Whinstone currently hosts Bitcoin mining operations for institutional-scale mining customers. In addition to Hosting revenue from customers, Whinstone also generates, as part of its Hosting revenue, construction services revenue from hosting customers on site, including revenue derived from the fabrication and deployment of immersion-cooling technology for Bitcoin mining.
From the May 26, 2021 acquisition date through December 31, 2021, Hosting revenue and net income was approximately $24.5 million and $1.2 million, respectively. Additionally, the majority of our $22.6 million of deferred revenue as of December 31, 2021 is related to advance payments made by Whinstone customers, which will be primarily recognized over the remaining lives of the underlying contracts, or approximately eight years.
Electrical Products and Engineering
The Acquisition of ESS Metron provides us with the ability to vertically integrate many of the critical electrical components and engineering services necessary for our Whinstone expansion. A key component of our strategy is to integrate the expertise of the ESS Metron team, which we believe is necessary to reduce our execution and counter-party risk in ongoing and future expansion projects. ESS Metron’s engineers will also allow us to continue to explore new methods to optimize and develop a best-in-class Bitcoin mining operation, and they have been instrumental in the development of our industrial-scale immersion-cooled Bitcoin mining hardware. ESS Metron also has an existing electricity distribution product design, manufacture, and installation business primarily focused on large-scale commercial and governmental customers.
COVID-19
The COVID-19 global pandemic has been unpredictable and unprecedented and 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.
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. During 2021, 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 2022. Additionally, the scale of the Whinstone expansion requires large quantities of specific materials. 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 Part I, Item 1A. “Risk Factors” of our Annual Report for additional discussion regarding potential impacts the global supply chain crisis may have on our operations and plans for expansion.
Summary of Mining Results
The following table presents additional information about our Mining activities, including cryptocurrency production and sales of the cryptocurrency the Company mined during the years ended December 31, 2021, 2020 and 2019 ($ in thousands):
Quantities | ||||||||
(in coins) | Amounts | |||||||
Balance at January 1, 2019 | 164 | $ | 707 | |||||
Revenue recognized from cryptocurrencies mined | 944 | 6,741 | ||||||
Mining pool operating fees | — | (135 | ) | |||||
Purchase of miner equipment with cryptocurrencies | (9 | ) | (99 | ) | ||||
Proceeds from sale of cryptocurrencies | (585 | ) | (3,196 | ) | ||||
Realized gain on sale/exchange of cryptocurrencies | — | 665 | ||||||
Impairment of cryptocurrencies | — | (844 | ) | |||||
Balance at December 31, 2019 | 514 | 3,839 | ||||||
Revenue recognized from cryptocurrencies mined | 1,033 | 11,984 | ||||||
Mining pool operating fees | — | (146 | ) | |||||
Proceeds from sale of cryptocurrencies | (500 | ) | (8,298 | ) | ||||
Realized gain on sale/exchange of cryptocurrencies | 26 | 5,184 | ||||||
Impairment of cryptocurrencies | — | (989 | ) | |||||
Cryptocurrencies received from sale of equipment | 5 | 52 | ||||||
Balance at December 31, 2020 | 1,078 | 11,626 | ||||||
Revenue recognized from cryptocurrencies mined | 3,812 | 184,422 | ||||||
Proceeds from sale of cryptocurrencies | (6 | ) | (295 | ) | ||||
Realized gain on sale/exchange of cryptocurrencies | — | 253 | ||||||
Impairment of cryptocurrencies | — | (36,462 | ) | |||||
Balance at December 31, 2021 | 4,884 | $ | 159,544 |
Results of Operations Comparative Results for the Years Ended December 31, 2021 and 2020:
Revenues:
Total revenue for the years ended December 31, 2021 and 2020, was $213.2 million and $12.1 million, respectively, and consisted of our Mining revenue, Hosting revenue, Engineering revenue, and other revenue.
For the years ended December 31, 2021 and 2020, Mining revenue was $184.4 million, and $12.0 million, respectively. The increase of $172.4 million in mining revenue was due to higher Bitcoin values in the 2021 period, averaging $45,744 per coin as compared to $11,461 per coin in the 2020 period, combined with a higher number of Bitcoin mined in 2021, which totaled 3,812, as compared to 1,033 in the 2020 period.
For the period from the acquisition of Whinstone on May 26, 2021 to December 31, 2021, Hosting revenue was $24.5 million, and there was no Hosting revenue for the year ended December 31, 2020.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 WhinstoneRockdale 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 period from the acquisition of ESS Metron on December 1, 2021 to December 31, 2021, Engineering revenue was $4.2 million, and there was no Engineering revenue for the year ended December 31, 2020. 2023, Data Center Hosting revenue was approximately $27.3 million.
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Engineering
Our Engineering business segment designs and manufacturers power distribution equipment and custom engineered electrical products that provide us with the ability to vertically integrate many of the critical electrical components and engineering services necessary for our Corsicana Facility development and Rockdale Facility expansions and to reduce our execution and counter-party risk in ongoing and future expansion projects. Engineering and other specialized talent employed in our Engineering business segment also allows us to continue to explore new methods to optimize and develop a best-in-class Bitcoin Mining operation and has been instrumental in the development of our industrial-scale immersion-cooled Bitcoin mining hardware.
Our Engineering business segment also provides electricity distribution product design, manufacturing, and installation services primarily focused on large-scale commercial and governmental customers and serves a broad scope of clients across a wide range of markets including data center, power generation, utility, water, industrial, and alternative energy. Products are custom built to client and industry specifications.
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 arerevenue is recognized over time as performance creates or enhances an asset with no alternative use, and for which the Company haswe have an enforceable right to receive compensation as defined under the contract.
For the year ended December 31, 2023, Engineering revenue was approximately $64.3 million.
Other revenue consistingIndustry Trends
During 2022 and 2023, we observed several companies in the Bitcoin ecosystem experience significant challenges and initiate bankruptcy proceedings due to the significant volatility in the price of license fees earned from our legacy animal bioscienceBitcoin, the increase in interest rates, the volatility in the spot price of power, and other national and global macroeconomic factors. We anticipate this trend will likely continue as companies attempt to shift their business was not significantmodels to operate on significantly compressed margins. Further affecting the margins of the companies within the Bitcoin ecosystem, the Bitcoin reward for solving a block is subject to periodic incremental halving, which is next anticipated to occur in either period.April 2024. The network halving is a preprogrammed, fixed process of the Bitcoin network where the Bitcoin reward for solving a block received by miners is reduced by half approximately every four years. The network halving will continue to occur on this schedule until the amount of Bitcoin in existence reaches the cap of 21.0 million. The network halving is a process designed to implement a periodic decreasing schedule of the issuance of new Bitcoin into the market which results in a predictable and controlled inflationary rate.
The dramatic increase in the price of Bitcoin observed in the market during prior years caused many companies to over-leverage themselves, thus operating in potentially unsustainable ways given the recent variability in the price of Bitcoin. Riot chose to refrain from engaging in any significant debt-financing activities during this period and, as a result, has not been subject to the significant debt-service shortfalls some of our competitors are experiencing. Despite such challenges in the ecosystem, Riot continues to focus on building long-term stockholder value by taking strategic action to vertically integrate our business, utilizing the Rockdale Facility and developing the Corsicana Facility. Management believes this focus will positively affect each of Riot’s three business segments by providing more capacity for our Bitcoin Mining and Data Center Hosting operations, and by capitalizing on supply chain efficiencies garnered through our Engineering segment. As we grow our business, we continue to focus on deploying our efficient Bitcoin mining fleet, at scale, while realizing the benefits of being an owner and operator of our Bitcoin Mining and Data Center Hosting facilities.
We anticipate companies in our industry will continue to experience challenges, and that 2024 will be a period of consolidation in the Bitcoin mining industry. Further, given our relative position, liquidity, and absence of any significant long-term debt, we believe we are well positioned to benefit from such consolidation. We are continuously evaluating strategic opportunities which we may decide to undertake as part of our strategic growth initiatives; however, we can offer no assurances that any strategic opportunities which we decide to undertake will be achieved on the schedule or within the budget we anticipate, if at all, in our competitive and evolving industry, and our business and financial results may change significantly as a result of such strategic growth.
The recent shutdowns of certain digital asset exchanges and trading platforms due to fraud or business failure has negatively impacted confidence in the digital asset industry as a whole and led to increased oversight and scrutiny of the industry. We did not have any exposure to any digital asset lenders or exchanges who have declared bankruptcy or have suspended operations. We only hold and sell Bitcoin that we have mined and do not sell, hold, or redeem any Bitcoin for any other parties. Our Bitcoin is held in cold storage wallets by a well-known U.S.-based third-party digital asset-focused custodian. We also sell our Bitcoin using our custodian’s U.S. brokerage services.
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In 2023, the banking industry and financial services sector experienced disruptions and instability. In March 2023, Silvergate Capital Corporation, the holding company for Silvergate Bank, which was primarily focused on the digital asset industry, announced its intent to wind down operations and voluntarily liquidate its holdings. Also in March 2023, Silicon Valley Bank and Signature Bank both closed and the FDIC was appointed receiver following their closures and transferred substantially all assets of the former banks to newly created, FDIC-operated bridge banks in an action to protect all depositors of the banks. In May 2023, First Republic Bank was closed, and the FDIC sold substantially all of First Republic Bank’s assets to JP Morgan Chase & Co.
Although we maintained certain operating accounts with Signature Bank prior to its closure, we have since transferred all our deposits previously held with the bank to other banking institutions. We did not lose access to our accounts or experience interruptions in banking services, and we suffered no losses with respect to our deposits at Signature Bank as a result of the bank’s closure. We did not have any banking relationships with Silicon Valley Bank, Silvergate Bank, or First Republic Bank, and currently hold our cash and cash equivalents at multiple banking institutions. Although we did not suffer any losses, we continue to monitor for updates to mitigate any future impacts we may be subject to as a result of instability of the banking industry and financial services sector.
See Part I, Item 1A. “Risk Factors” of this Annual Report for additional discussion regarding potential impacts our competitive and evolving industry may have on our business.
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 Annual Report, we have been able to effectively and efficiently mitigate delivery delays to avoid materially impacting our miner deployment schedule, however, we cannot guarantee that we will be able to continue to mitigate any such delivery delays in the future.
Additionally, 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 already hold many of the required materials to help navigate challenges related to global supply logistics and mitigate any inflationary pricing concerns that may come from global supply delays.
We continue to monitor developments in the global supply chain and assess their potential impact on our expansion plans.
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Summary of Bitcoin Mining Results
The following table presents additional information about our Bitcoin Mining activities, including Bitcoin production and sales of the Bitcoin mined:
| | | | | |
|
| Quantity |
| Amounts | |
Balance as of January 1, 2021 |
| 1,078 | | $ | 10,186 |
Revenue recognized from Bitcoin mined |
| 3,812 | |
| 184,422 |
Exchange of Bitcoin for employee compensation |
| (6) | |
| (295) |
Realized gain on sale/exchange of Bitcoin |
| — | |
| 253 |
Impairment of Bitcoin |
| — | |
| (43,973) |
Balance as of December 31, 2021 |
| 4,884 | |
| 150,593 |
Revenue recognized from Bitcoin mined |
| 5,554 | |
| 156,870 |
Proceeds from sale of Bitcoin |
| (3,425) | |
| (79,529) |
Exchange of Bitcoin for employee compensation | | (39) | | | (1,495) |
Realized gain on sale/exchange of Bitcoin |
| — | |
| 30,346 |
Impairment of Bitcoin |
| — | |
| (147,365) |
Balance as of December 31, 2022 |
| 6,974 | |
| 109,420 |
Cumulative effect upon adoption of ASU 2023-08 | | — | | | 5,994 |
Revenue recognized from Bitcoin mined |
| 6,626 | |
| 188,996 |
Bitcoin receivable | | (21) | | | (878) |
Proceeds from sale of Bitcoin |
| (6,185) | |
| (176,219) |
Exchange of Bitcoin for employee compensation | | (32) | | | (869) |
Change in fair value of Bitcoin |
| — | |
| 184,734 |
Balance as of December 31, 2023 |
| 7,362 | | $ | 311,178 |
Results of Operations Comparative Results for the Years Ended December 31, 2023 and 2022
Revenue
Total revenue for the years ended December 31, 2023 and 2022, was $280.7 million and $259.2 million, respectively, and consisted of our Bitcoin Mining revenue, Data Center Hosting revenue, Engineering revenue, and other revenue.
For the years ended December 31, 2023 and 2022, Bitcoin Mining revenue was $189.0 million and $156.9 million, respectively. The increase of $32.1 million was primarily due to a 19.3% increase in the number of Bitcoin mined in the 2023 period as compared to the 2022 period as a result of an increase in miners deployed, partially offset by an increase in the Bitcoin network difficulty. Additionally, we continued employing our power strategy to significantly reduce overall power costs. As described below, during the years ended December 31, 2023 and 2022, we earned $71.2 million and $27.3 million, respectively, in power credits, which were recognized as offsets to our operating expenses, but equated to approximately 2,497 Bitcoin and 968 Bitcoin, respectively, as computed using the average daily Bitcoin prices for the applicable period.
For the years ended December 31, 2023 and 2022, Data Center Hosting revenue was $27.3 million and $36.9 million, respectively. The decrease of $9.6 million was primarily due to hosting fewer customers during the 2023 period as we continue to address legacy contracts. For information regarding measures we have taken to address legacy contracts, see the discussion under “Legacy Hosting Customer Disputes” in Note 17. Commitments and Contingencies to our Consolidated Financial Statements.
For the years ended December 31, 2023 and 2022, Engineering revenue was $64.3 million and $65.3 million, respectively. The decrease of $1.0 million was primarily attributable to supply chain constraints resulting in decreased receipts of materials, delaying the completion of certain custom products, and therefore, the recognition of revenue. Our custom electrical products such as switchgear and power distribution centers are used as important components in data center development and in power generation and distribution facilities, and there has been increased demand for these products due to the continued increase in data center construction by developers, as well as the continually increasing worldwide demand for power.
Costs and expenses:
expenses
Cost of revenuesrevenue for Bitcoin Mining for the years ended December 31, 20212023 and 20202022 was $45.5$96.6 million and $6.3$74.3 million, respectively, representing an increase of approximately $39.2$22.3 million. As a percentage of Bitcoin Mining revenue, cost of revenuesrevenue totaled 24.7%51.1% and 52.2%47.4% for each of the years ended December 31, 20212023 and 2020,2022, respectively. CostBitcoin Mining cost of revenues consistrevenue
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consists primarily of direct production costs of mining operations, including electricity, labor, insurance and, in 2020, rent for the Oklahoma City facility and, in 2021,a portion of 2022, the variable Coinmint hosting fee, but excluding depreciation and amortization, which are separately stated. The increase of $39.2 million in cost of revenues is was primarily due to the increases in variable mining costs, including the variable hosting fees associated with increasesincrease in mining revenues.
capacity at the Rockdale Facility, which requires more headcount and direct costs necessary to maintain and support the mining operations. During the years ended December 31, 2023 and 2022, we earned $71.2 million and $27.3 million, respectively, in power credits, to be credited against our power invoices, as a result of temporarily pausing our operations. These credits are recognized in power curtailment credits in the statements of operations, outside of cost of revenue, but significantly reduce our overall cost to mine Bitcoin. When reducing the cost of revenue for Bitcoin Mining by the power curtailment credits allocated to Bitcoin Mining, the non-GAAP Bitcoin Mining revenue in excess of cost of revenue, net of power curtailment credits, as a percentage of revenue was 73.6% and 60.3% for the years ended December 31, 2023 and 2022, respectively, compared with Bitcoin Mining revenue in excess of cost of revenue, as a percentage of revenue of 48.9% and 52.6% (without reducing the cost of revenue for Bitcoin Mining by the power curtailment credits allocated to Bitcoin Mining) for the years ended December 31, 2023 and 2022, respectively. For a reconciliation of Bitcoin Mining revenue in excess of cost of revenue to Bitcoin Mining revenue in excess of cost of revenue, net of power curtailment credits, see the subheading below titled “Non-GAAP Measures”.
Cost of revenuesrevenue for Data Center Hosting for the period from the acquisition of Whinstone on May 26, 2021 to December 31, 2021 was $33.0 million and there were no Hosting costs for the yearyears ended December 31, 2020.2023 and 2022 was $97.1 million and $61.9 million, respectively, an increase of approximately $35.2 million. The 2021 costs consisted primarily of $25.8 million for direct power costs, with the balance primarily incurred for rent and compensation and rent costs.
The increase was primarily attributable to the significant increase in size of our Rockdale Facility over the period, which has more than doubled since 2021.
Cost of revenuesrevenue for Engineering for the period from the acquisition of ESS Metron on December 1, 2021 to December 31, 2021 was $3.6 million and there were no Engineering costs for the yearyears ended December 31, 2020. 2023 and 2022 was $60.6 million and $57.5 million, respectively. The 2021 costs consisted primarily of $3.6 million for direct materials and labor, as well as indirect manufacturing costs.
Acquisition-related costs The increase was primarily due to increased cost of labor and materials, partially offset by decreased receipts of materials resulting from increased competition for the year ended December 31, 2021 totaled $21.2 million and consisted of expenses incurred in connection with our acquisitions of Whinstone and ESS Metron. There were no acquisition-related costs for the year ended December 31, 2020.direct materials due to supply chain constraints.
Selling, general and administrative expenses during the years ended December 31, 20212023 and 20202022 totaled $87.4$100.3 million and $10.3$67.5 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 $77.2$32.9 million iswas primarily dueattributable to an increase in stock-compensation expense of $65.1 million resulting from additional awards (including the performance-based plan announced in August 2021), compensation expense, which increased by $5.7$12.2 million due toas a result of hiring additional employees to support our ongoing growth, increased stock-based compensation of $7.6 million due to the Company’s growth,adoption of the long-term incentive plan and additional headcount, increased legal and professional fees of $8.1 million primarily related to ongoing litigation and public company compliance, and an increase of $5.0 million in consulting fees of $2.6 million resulting primarily from assistance on internal control systemsother general operating costs such as insurance and procedures.
information technology projects to support our growth.
Depreciation and amortization expense during the yearyears ended December 31, 20212023 and 2022 totaled $26.3$252.4 million which is anand $108.0 million, respectively. The increase of approximately $21.8$144.4 million as compared to $4.5 million for the year ended December 31, 2020. The increase iswas primarily due to higher depreciation expense recognized for the WhinstoneRockdale Facility and ourthe significant increase in the number of recently acquired miners.
and deployed miners.
Change in fair value of Bitcoin for the year ended December 31, 2023, was a gain of $184.7 million, and was recognized as a result of adopting Accounting Standards Update (“ASU”) No. 2023-08, Intangibles-Goodwill and Other-Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets (“ASU 2023-08”), effective January 1, 2023, under which Bitcoin is recognized at fair value with changes in fair value recognized in net income. The gain recognized was attributable to increases in the price of Bitcoin and the increased quantity of Bitcoin held as of December 31, 2023, as compared to December 31, 2022.
Changes in fair value of our derivative asset for the period from the acquisition of Whinstone toyears ended December 31, 2021, was $18.62023 and 2022 were gains of $6.7 million including $12.1and $71.4 million, respectively, and were recorded to adjust the fair value of our Power Supply Agreement,PPA, which was classified as a derivative asset and measured at fair value. The changes in fair value onwere due to changes in future power prices over the date of our acquisition of Whinstone, and $6.5 million from power sales to ERCOT through its demand response programs. There were no derivative assets forapplicable period.
Power curtailment credits during the yearyears ended December 31, 2020.2023 and 2022 were $71.2 million and $27.3 million, respectively, and represent sales of unused power under our PPA and participation in ancillary services under ERCOT Demand Response Services Programs. The amount of these credits varies from period to period depending on various factors impacting the supply of power to, and the demand for power on, the ERCOT power grid, such as weather and global fuel costs.
Realized gains on sale/exchange of Bitcoin for the years ended December 31, 2023 and 2022 were zero and $30.3 million, respectively, and impairment of Bitcoin was zero and $147.4 million, respectively. As a result of adopting ASU 2023-08 effective January 1, 2023, under which Bitcoin is recognized at fair value, gains on the sale/exchange of Bitcoin and impairment of Bitcoin are no longer recognized.
ImpairmentCasualty-related (charges) recoveries, net during the years ended December 31, 2023 and 2022 were $6.0 million and ($9.7) million, respectively. In December 2022, the Rockdale Facility was damaged during severe winter storms in Texas, resulting in casualty-
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related charges being recognized in 2023 and 2022. The income recognized during the year ended December 31, 20202023, was recorded in connection with the impairmentresult of our investment in Coinsquare Ltd., a Canadian cryptocurrency cash recoveries from insurance claims related to the December 2022 winter storms.
Gain (loss) on the sale/exchange (“Coinsquare”).
Impairment of cryptocurrencies forequipment during the years ended December 31, 20212023 and 20202022 was $36.5$(5.3) million and $1.0$16.3 million, respectively, arising from the decline in Bitcoin pricesrespectively. The loss on sale during the periods.year ended December 31, 2023 was attributable to the sale of 2,700 Antminer model S19 XP miners for gross proceeds of $6.4 million. The gain on sale during the year ended December 31, 2022 was attributable to us exchanging approximately 5,700 Antminer model S19 Pro miners previously deployed at the Coinmint Facility for 5,000 factory-new Antminer model S19j Pro miners.
Other Income:
Other income for(expense)
For the years ended December 31, 20212023 and 20202022, total other income (expense) was $14.7$8.5 million and $1.5($8.6) million, respectively. The increaseincome recognized during the year ended December 31, 2023 was primarily attributable to interest income earned as a result of $13.2higher cash balances and increased interest rates. The loss incurred in 2022 primarily consisted of realized losses on marketable equity securities of $9.0 million is primarily related to a $26.3 million realized gain onupon the sale/exchangesale of long-term investment recognized in connection with the exchangeall of our shares of Coinsquare, partially offset by a $13.7 million unrealized loss on the decline in fair value our marketable equity securities.
Income Taxes:Taxes
For the yearyears ended December 31, 2021 the Company recorded an2023 and 2022, total income tax expense of $0.3 million. Therebenefit (expense) was no$5.1 million and $11.7 million, respectively. The decrease in income tax expense or benefit recorded forof $6.6 million was primarily attributable to the year ended December 31, 2020.change in the contingent consideration liability.
Non-GAAP Measures
In addition to consolidated U.S. GAAP financial measures presented under generally accepted accounting principles in the United States (“GAAP”), we consistently evaluate our use of and calculation of the non-GAAP financial measure,measures such as “Adjusted EBITDA.” 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 a financial measure defined as EBITDA further adjusted forto eliminate the effects of certain income and expenses,non-cash and/or non-recurring items that do not reflect our ongoing strategic business operations, which management believes results in a performance measurement that represents a key indicator of the Company’sour 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. In 2021, we included impairments of cryptocurrencies and gain or losses on sales of cryptocurrencies as part of our calculation of Adjusted EBITDA. Based upon recent SEC comments to another issuer, we have determined to exclude impairments of cryptocurrencies and gain or losses on sales of cryptocurrencies from our calculation of Adjusted EBITDA as of December 31, 2021. We will continue to evaluate the positions of FASB and SEC on the accounting treatment of cryptocurrencies.
We believe Adjusted EBITDA 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 return on capital and operating efficiencies, from period-to-period by making such adjustments. Additionally, Adjusted EBITDA is used as a performance metric for share-based compensation.
Adjusted EBITDA is provided in addition to, and should not be considered to be a substitute for, or superior to, net income, the most comparable measure under U.S. GAAP.GAAP to Adjusted EBITDA. Further, Adjusted EBITDA 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 has limitations as an analytical tool, and you should not consider such measuresthis financial measure either in isolation or as substitutesa substitute for analyzing our results as reported under U.S. GAAP.
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The following table reconciles Adjusted EBITDA to Net income (loss), the most comparable GAAP financial measure:
| | | | | | | | | |
| | Years Ended December 31, | |||||||
|
| 2023 |
| 2022 | | 2021 | |||
Net income (loss) | | $ | (49,472) | | $ | (509,553) | | $ | (15,437) |
Interest (income) expense | |
| (8,222) | |
| (454) | |
| 296 |
Income tax expense (benefit) | |
| (5,093) | |
| (11,749) | |
| 254 |
Depreciation and amortization | |
| 252,354 | |
| 107,950 | |
| 26,324 |
EBITDA | |
| 189,567 | |
| (413,806) | |
| 11,437 |
| |
|
| |
|
| |
|
|
Adjustments: | |
|
| |
|
| |
|
|
Stock-based compensation expense | |
| 32,170 | |
| 24,555 | |
| 68,491 |
Acquisition-related costs | |
| — | |
| 78 | |
| 21,198 |
Change in fair value of derivative asset | |
| (6,721) | |
| (71,418) | |
| (12,112) |
Change in fair value of contingent consideration | |
| — | |
| (159) | |
| 975 |
Realized gain on sale/exchange of long-term investment | |
| — | |
| — | |
| (26,260) |
Realized loss on sale of marketable equity securities | | | — | | | 8,996 | | | — |
Unrealized (gain) loss on marketable equity securities | |
| — | |
| — | |
| 13,655 |
Loss (gain) on sale/exchange of equipment | |
| 5,336 | |
| (16,281) | |
| — |
Casualty-related charges (recoveries), net | | | (5,974) | |
| 9,688 | |
| — |
Impairment of goodwill | | | — | | | 335,648 | | | — |
Impairment of miners | | | — | | | 55,544 | | | — |
Other (income) expense | |
| (260) | |
| 59 | |
| (2,378) |
License fees | |
| (97) | |
| (97) | |
| (97) |
Adjusted EBITDA | | $ | 214,021 | | $ | (67,193) | | $ | 74,909 |
In addition to Adjusted EBITDA, we believe “Bitcoin Mining revenue in excess of cost of revenue, net of power curtailment credits”, “Data Center Hosting revenue in excess of cost of revenue, net of power curtailment credits”, “Cost of revenue – Bitcoin Mining, net of power curtailment credits” and “Cost of revenue – Data Center Hosting, net of power curtailment credits” are additional non-GAAP performance metrics that represent a key indicator of our core business operations of both Bitcoin Mining and Data Center Hosting.
We believe our ability to offer 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 power 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 also 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 Bitcoin Mining and Data Center Hosting segments based on their proportional power consumption during the periods presented.
Bitcoin Mining revenue in excess of cost of revenue, net of power curtailment credits, Data Center Hosting revenue in excess of cost of revenue, net of power curtailment credits, Cost of revenue – Bitcoin Mining, net of power curtailment credits and Cost of revenue – Data Center Hosting, net of power curtailment credits are provided in addition to and should not be considered to be a substitute for, or superior to Revenue – Bitcoin Mining, Revenue – Data Center Hosting, Cost of revenue – Bitcoin Mining or Cost of revenue – Data Center Hosting as presented in our Consolidated Statements of Operations.
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ReconciliationsTable of Adjusted EBITDAContents
The following table presents reconciliations of these non-GAAP performance metrics to the most comparable U.S. GAAP financial metric for historical periods are presented in the table below:measures:
| | | | | | | | | |
| | Years Ended December 31, | |||||||
|
| 2023 |
| 2022 | | 2021 | |||
Bitcoin Mining | | | | | | | | | |
Revenue (A) | | $ | 188,996 | | $ | 156,870 | | $ | 184,422 |
Cost of revenue | |
| 96,597 | |
| 74,335 | |
| 45,513 |
Bitcoin Mining revenue in excess of cost of revenue (B) | | | 92,399 | | | 82,535 | | | 138,909 |
| | | | | | | | | |
Power curtailment credits allocated to Bitcoin Mining | |
| 46,646 | |
| 11,991 | |
| — |
Bitcoin Mining revenue in excess of cost of revenue, net of power curtailment credits (C) | | $ | 139,045 | | $ | 94,526 | | $ | 138,909 |
| | | | | | | | | |
Bitcoin Mining revenue in excess of cost of revenue, as a percentage of revenue (B/A) | | | 48.9% | | | 52.6% | | | 75.3% |
Bitcoin Mining revenue in excess of cost of revenue, net of power curtailment credits, as a percentage of revenue (C/A) | |
| 73.6% | |
| 60.3% | |
| 75.3% |
| | | | | | | | | |
Data Center Hosting | |
| | | | | | | |
Revenue (A) | | $ | 27,282 | | $ | 36,862 | | $ | 24,546 |
Cost of revenue | | | 97,122 | | | 61,906 | | | 32,998 |
Data Center Hosting revenue in excess of cost of revenue (B) | | | (69,840) | | | (25,044) | | | (8,452) |
| | | | | | | | | |
Power curtailment credits allocated to Data Center Hosting | |
| 24,569 | |
| 15,354 | |
| 6,514 |
Data Center Hosting revenue in excess of cost of revenue, net of power curtailment credits (C) | | $ | (45,271) | | $ | (9,690) | | $ | (1,938) |
| | | | | | | | | |
Data Center Hosting revenue in excess of cost of revenue, as a percentage of revenue (B/A) | | | (256.0)% | | | (67.9)% | | | (34.4)% |
Data Center Hosting revenue in excess of cost of revenue, net of power curtailment credits, as a percentage of revenue (C/A) | |
| (165.9)% | |
| (26.3)% | |
| (7.9)% |
| | | | | | | | | |
Allocation of Power Curtailment Credits | | | | | | | | | |
Consolidated power curtailment credits | |
| 71,215 | |
| 27,345 | |
| 6,514 |
Percentage of consolidated power curtailment credits allocated to Bitcoin Mining | | | 65.5% | | | 43.9% | | | 0.0% |
Percentage of consolidated power curtailment credits allocated to Data Center Hosting | | | 34.5% | | | 56.1% | | | 100.0% |
ReconciliationLIQUIDITY AND CAPITAL RESOURCES
As of GAAP and Non-GAAP Financial Information
Years Ended December 31, | ||||||||||||
(in thousands) | 2021 | 2020 | 2019 | |||||||||
Net income (loss) | $ | (7,926 | ) | $ | (12,667 | ) | (20,303 | ) | ||||
Interest (income) expense | 296 | (85 | ) | — | ||||||||
Income tax expense (benefit) | 254 | — | (143 | ) | ||||||||
Depreciation and amortization | 26,324 | 4,494 | 119 | |||||||||
EBITDA | 18,948 | (8,258 | ) | (20,279 | ) | |||||||
Adjustments: | ||||||||||||
Non-cash/non-recurring operating expenses: | ||||||||||||
Stock-based compensation expense | 68,491 | 3,407 | 745 | |||||||||
Acquisition-related costs | 21,198 | — | — | |||||||||
Change in fair value of derivative asset (gain) loss | (12,112 | ) | — | — | ||||||||
Change in fair value of contingent consideration (gain) loss | 975 | — | — | |||||||||
Realized (gain) on sale/exchange of long-term investment | (26,260 | ) | — | — | ||||||||
Unrealized (gain) loss on marketable equity securities | 13,655 | — | — | |||||||||
Reversal of registration rights penalty | — | (1,358 | ) | — | ||||||||
Loss on issuance of convertible notes, common stock and warrants | — | — | 6,155 | |||||||||
Change in fair value of warrant liability | — | — | 2,869 | |||||||||
Change in fair value of convertible notes | — | — | 3,896 | |||||||||
Gain on deconsolidation of Tess | — | — | (1,139 | ) | ||||||||
Gain on sale of equipment | — | (29 | ) | — | ||||||||
Other (income) expense | (2,378 | ) | 6 | (874 | ) | |||||||
Other revenue, (income) expense items: | ||||||||||||
License fees | (97 | ) | (97 | ) | (96 | ) | ||||||
Adjusted EBITDA | $ | 82,420 | (6,329 | ) | $ | (8,723 | ) |
Results of Operations Comparative Results for the Years Ended December 31, 2020 and 2019:
Revenues:
Mining revenues for the years ended December 31, 2020 and 2019, totaled approximately $12.0 million and $6.7 million, respectively. Other revenue consisted of license payments2023, we had net working capital of approximately $0.1$887.6 million, in each period. Revenues from cryptocurrency mining are impacted significantly by volatility in Bitcoin prices, as well as increases in the Bitcoin blockchain’s network hash rate resulting from the growth in the overall quantityincluding cash and qualitycash equivalents of miners working to solve blocks on the Bitcoin blockchain and the difficulty index associated with the secure hashing algorithm employed in solving the blocks.
From early 2019 to the end$597.2 million. We reported a net loss of 2020 the Bitcoin blockchain’s network hash rate increased by approximately 249% as a result of, among other factors, the increased number of miners working to solve blocks on the Bitcoin blockchain$49.5 million during that period, many of which make use of newer, more efficient ASIC chips that are specially designed to solve blocks using the SHA-256 set of cryptographic hash functions employed on the Bitcoin blockchain. For years ended December 31, 2020 and 2019, the average network hash rate working on the Bitcoin blockchain was 142.74 EH/s and 98.67 EH/s, respectively. Further, the difficulty index increased over 231% in the past two fiscal years. The cumulative difficulty index increase over each of years ended December 31, 2020 and 2019 was 43.79% and 97.67%, respectively.
Cost and Expenses:
Cost of revenue for the year ended December 31, 20202023. The net loss included $91.7 million in non-cash income items, primarily consisting of approximately $6.3$189.0 million consisted primarily of direct production costsBitcoin revenue and $184.7 million in Change in fair value of the mining operations, including rent and utilities and fees paid to Coinmint pursuant to the Coinmint Agreement, but excludingBitcoin, partially offset by depreciation and amortization which are separately stated. The cost of revenue for the year ended December 31, 2019 was approximately $6.1$252.4 million. The cost of revenue for the years ended December 31, 2020 and 2019 as a percentage of mining revenue totaled 52.2% and 90.4%, respectively. The improvement in 2020 resulted from higher average Bitcoin values for mined Bitcoin and lower fixed and variable costs incurred for costs of revenue for the second half of 2020 following the relocation to the Coinmint Facility.
During the year ended December 31, 2020,2023, we recorded a gain on the sale / exchange of cryptocurrenciessold 6,185 Bitcoin for proceeds of approximately $5.2$176.2 million. We monitor our balance sheet on an ongoing basis and evaluate the level of Bitcoin retained from monthly production in consideration of our cash requirements for ongoing operations and expansion.
Contractual Commitments (Miners and Mining Equipment)
During the year ended December 31, 20192023, the gainCompany paid $191.1 million in deposits and payments to MicroBT for the purchase of miners described herein. The remaining commitment of approximately $270.4 million is due in installments through approximately April 2025 based on salethe estimated miner delivery schedule. Total payments of cryptocurrencies was $0.7 million.
Selling, General$220.0 million and Administrative Expenses:
Selling, general$50.4 million are expected to be made in 2024 and administrative expenses for2025, respectively.
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During the year ended December 31, 2020 totaled approximately $10.3 million, which is an approximately $1.1 million, or a 11.9% increase, as compared to $9.22023, the Company paid $31.2 million in the 2019 period. Compensation related expense decreased by approximately $0.6 million due primarilydeposits and payments to staff reductions during 2019, net of severance costs and the compensation expense of $0.3 for Tess Pay, Inc.Midas Green Technologies, LLC (d/b/a Midas Immersion Cooling) (“Tess”Midas”) in the 2019 period, which in 2020 is no longer reported in our consolidated financial statements. Stock-based compensation increased by approximately $2.7 million for the year ended December 31, 2020 as compared withpurchase of immersion cooling systems described herein. The remaining commitment of approximately $21.1 million is due in installments in early 2024, based on the 2019 period due to the 2020 issuance of 1,544,359 restricted stock units and the accelerated vesting of 471,544 restricted stock units due to the resignation of a memberestimated delivery schedule.
Development of the Company’s board. Legal fees decreased by approximately $0.6 million due to legal matters associated primarily with the fees for the class action and derivative suits and special SEC related matters being higher in the 2019 period. Audit fees decreased approximately $0.3 million due to the higher level of financial activities and the audit of internal controls over financial reporting incurred for the year ended December 31, 2019.
Depreciation and Amortization:
Depreciation and amortization expenses in the year ended December 31, 2020 totaled approximately $4.5 million, which is an increase of approximately $4.4 million, compared to $0.1 million during the year ended December 31, 2019. The increase is primarily due to higher average depreciable equipment levels in the year ended December 31, 2020 resulting from the Company’s acquisition of 7,043 new miners, which the Company depreciates over their two-year estimated usable lives using the straight-line method.
Asset Impairment Charges:
Impairment of long-term investments of $9.4 million recognized during the year ended December 31, 2020 was recorded in connection with the impairment of our investment in Coinsquare. The Company recorded this 100% impairment as a result of the OSC Order and Settlement Agreement in which Coinsquare and certain of its executives and directors admitted to violations of Ontario securities laws and conduct contrary to the public interest in connection with their operation of the Coinsquare Market.
Impairment charges for cryptocurrencies was $1.0 million for the year ended December 31, 2020, which was recorded to recognize an impairment of our cryptocurrencies during the three months ended March 31, 2020.
Asset impairment charges of $1.5 million were recognized during the year ended December 31, 2019 and were related to $0.8 million for the impairment of our cryptocurrencies accounted for as intangible assets and $0.7 million related to our intangible assets acquired in connection with our former RiotX / Logical Brokerage business.
Other Income and Expense:Corsicana Facility Data Center
During the year ended December 31, 2020,2022, we recognized incomeannounced the initiation of approximately $1.4 milliona large-scale development to expand our Bitcoin mining and data center hosting capabilities in connectionNavarro County, Texas with the reversalacquisition of our registration rights penalty.
Duringa 265-acre site where the year ended December 31, 2019, we recognized losses relatedanticipated one-gigawatt Corsicana Facility is being constructed. We received approval from ERCOT for the entire one-gigawatt capacity. The initial phase of the development of the Corsicana Facility involves the construction on the 265-acre site of 400 MW 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 issuancefacility. Construction of convertible notes of approximately $6.2 million and expenses totaling $6.8 million to revalue the notessubstation and the related warrant liabilitydata centers is expected to fair value.
Duringbe carried out concurrently, with self-mining operations expected to commence by the year ended December 31, 2019, we recorded a gainend of approximately $1.1 million on the deconsolidationfirst quarter of Tess, due to our reduced ownership interest from 50.2% to 8.8%. No such expense was recognized during2024, following the year ended December 31, 2020.
Duringcommissioning of the years ended December 31, 2020 and 2019, interest income and interest expense was nominal.
Other expense for the year ended December 31, 2020 was nominal. Other income was approximately $0.9 million for the year ended December 31, 2019, due to a $0.4 million gain on forgiveness of our payable and interest in connection with our former agreement with BMSS, and a $0.5 million gain on forgiveness of various accounts payable balances.
Income Taxes:
For the years ended December 31, 2020 and 2019, the Company recorded income tax benefits of zero and $0.1 million, respectively.
LIQUIDITY AND CAPITAL RESOURCESsubstation.
At December 31, 2021, we had working capital of approximately $463.7 million, which included cash and cash equivalents of $312.3 million. We reported a net loss of $7.9 million during the year ended December 31, 2021. Net loss included $108.9 million in non-cash items consisting primarily of a realized gain on the sale/exchange of long-term investment of $26.3 million and the change in fair value of our derivative asset of $12.1 million, offset by stock-based compensation expense of $68.5 million, the impairment of cryptocurrencies of $36.5 million, depreciation and amortization of $26.3 million, an unrealized loss on marketable securities of $13.7 million, the issuance of common stock warrants of $1.2 million and income tax expense of $0.3 million.
Contractual Commitments
At December 31, 2021, we had the following contractual commitments (in thousands):
Agreement Date * | Original Purchase Commitment | Open Purchase Commitment | Deposit Balance | Expected Shipping | ||||||||||
April 5, 2021 | $ | 138,506 | $ | 52,838 | $ | 85,668 | First Quarter 2022 - Fourth Quarter 2022 | |||||||
October 29, 2021 | 56,250 | 31,950 | 24,300 | Second Quarter 2022 - Third Quarter 2022 | ||||||||||
November 22, 2021 | 32,550 | 21,158 | 11,392 | Third Quarter 2022 - Fourth Quarter 2022 | ||||||||||
December 10, 2021 | 97,650 | 63,472 | 34,178 | Third Quarter 2022 - Fourth Quarter 2022 | ||||||||||
December 24, 2021 | 202,860 | 131,859 | 71,001 | Third Quarter 2022 - Fourth Quarter 2022 | ||||||||||
Total | $ | 527,816 | $ | 301,277 | $ | 226,539 |
* Pursuant to the Company’s agreements with Bitmain, the Company is responsible for all shipping charges incurred in connection with the deliveryThis first phase of the miners.
Coinmint Co-location Mining Services Agreement
On April 8, 2020, the Company entered into an agreement with Coinmint (the “Coinmint Agreement”), pursuant to which Coinmint agreed to provide up to approximately 9.5 MW 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 has subsequently been increased to accommodate Riot’s expanding miner fleet. However, no formal written amendment to the Coinmint Agreement solidifying Riot’s continuing access to sufficient power to operate its expanding fleet of miners has been entered into with Coinmint. The initial termdevelopment of the Coinmint Agreement was six months,Corsicana Facility includes land acquisition, site preparation, substation development, and transmission construction, along with automatic renewals for subsequent three month terms until terminated as provided inconstruction of ancillary buildings and four buildings utilizing our immersion-cooling infrastructure and technology. We estimate that the agreement.
Miners
During 2021, we entered into six purchase agreements with Bitmain to acquire 52,500 Antminer model S19j (90 Terahash per second) (“TH/s”) miners and 30,000 of their latest Antminer model S19XP (140 TH/s) miners for a combined total purchase price of approximately $535.0 million. Pursuant to these agreements, approximately $301.3 million remains payable to Bitmain in installments in advance of shipmentcost of the miners,first phase of the development will be approximately $333.0 million, which is scheduled to occur on a monthly basisbe invested through December 2022. Of the remaining miners to be delivered, 48,495 new S19j-Pro model miners and 30,000 new S19XP model miners are all scheduled to be delivered throughout the year endedmid-2024. Through December 31, 2022.
During the year ended December 31, 2020, the Company entered into purchase agreements with Bitmain for the acquisition of a total of 33,646 of their model S19, S19-Pro, and S19j-Pro Antminer series of miners, to be shipped and delivered during 2020 and 2021. During the year ended December 31, 2020, the Company received 3,043 model S19 Antminers of these 33,646 new miners, all of which were deployed at the Coinmint Facility. The remaining 30,603 of these new miners were delivered in monthly shipments through January 2022.
During December 2019, the Company purchased 4,000 Bitmain model S17-Pro Antminers for a total purchase price2023, we had incurred costs of approximately $6.3$217.8 million directly from Bitmain. During the year ended December 31, 2020, the Company relocated all 4,000 of these miners from its former Oklahoma facilityrelated to the Coinmintdevelopment of the Corsicana Facility, in Massena, New York.which consisted of $10.1 million for land, $203.0 million of initial developments costs and equipment and a $4.7 million deposit for future power usage. We expect to incur costs of approximately $115.2 million during the first half of 2024.
Revenue from Operations
Bitcoin Mining
Funding our operations on a go-forward basis will rely significantly on our ability to mine Bitcoin at a price above our Bitcoin Mining costs and revenue generated from our Hosting and Engineering customers. We expect to generate ongoing revenuesrevenue from Bitcoin rewards fromin connection with our Bitcoin Mining operations and our ability to liquidate Bitcoin rewards at future values will be regularly 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 revenueproceeds from the sale of our Bitcoin produced from our Bitcoin 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 Part I, Item 1A. “Risk Factors” of this Annual Report.
Data Center Hosting
In general, we provide power for our data center customers on a variable (sub-metered) basis. A customer pays us variable monthly fees for the specific amount of power utilized at rates specified in each contract, subject to certain minimums. We recognize variable power revenue each month as the uncertainty related to the consideration is resolved, power is provided to our customers, and our customers utilize the power (the customer simultaneously receives and consumes the benefits of our performance).
We generate engineering and construction services revenue from the fabrication and deployment of immersion cooling technology for Bitcoin mining customers, for which we bill the customer at a fixed monthly fee or at an hourly rate. For the construction of customer-owned equipment, revenue is recognized upon completion of each phase of the construction project, as defined in each contract. For the construction of assets owned by us but paid for and used by the customer during the term of their data center hosting contract, revenue is recognized on a straight-line basis over the remaining life of the contract.
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Maintenance services include cleaning, cabling, and other services to maintain the customers’ equipment. We bill the customer at a fixed monthly fee or at an hourly rate. Revenue is recognized as these services are provided.
Engineering
Substantially all engineering revenue is derived from the sale of custom products built to customers’ specifications under fixed-price contracts. Revenue is recognized over time as performance creates or enhances an asset with no alternative use, and for which we have an enforceable right to receive compensation as defined under the contract. The length of time required to complete a custom product varies but is typically between four to 12 weeks.
Customers are typically required to make periodic progress payments based on contractually agreed-upon milestones.
If we are unable to generate sufficient revenue from our Bitcoin 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.
At-the-MarketATM Equity Offerings
20212023 ATM Offering
In August 2021,2023, we entered into a Sales Agreement with Cantor Fitzgerald & Co., B. Riley FBR, Inc., BTIG, LLC, Compass Point Research & Trading, LLC and Roth Capital Partners, LLC (the “Sales Agents”) dated August 31, 2021 (the “Sales Agreement”), pursuant tothe 2023 ATM sales agreement under which we sold $600could offer and sell up to $750.0 million in shares of our common stock through the Sales Agents, acting as our sales agent and/or principal, in a continuous at-the-market offering (the “2021 ATM Offering”). All sales of the shares in connection with the ATM Offering were made pursuant to an effective shelf registration statement on Form S-3 (Registration No. 333-259212) filed with the SEC on August 31, 2021. stock.
During the period August 31, 2021 toyear ended December 31, 2021,2023, we received net proceeds of approximately $571.6 million ($583.3 million of gross proceeds, of $600 million ($587.2 million, net of $12.8$11.7 million in commissions paid to the Sales Agents and expenses) from the sale of 19,910,58945,758,400 shares of our common stock with anat a weighted average fair value of $29.53$13.07 per share inunder the 20212023 ATM Offering. As of December 31, 2021, all $600
2022 ATM Offering
In March 2022, we entered into an ATM sales agreement under which we could offer and sell up to $500.0 million in shares of our common stock registered understock.
During the year ended December 2021 Registration Statement had been issued and, accordingly, we completed the 2021 ATM Offering.
2020 ATM Offering
During January 2021, in connection with the Second Amendment to the At-the-Market Sales Agreement, as amended, with our sales agent under such agreement, H.C. Wainwright,31, 2022, we received gross proceeds of approximately $84.8$304.8 million ($82.7298.2 million, net after $2.1of $6.6 million in commissions and expenses), from the sale of 37,052,612 shares of common stock at an average fair value of $8.23 per share under the 2022 ATM Offering.
During the year ended December 31, 2023, we received net proceeds of approximately $191.2 million ($195.2 million of gross proceeds, net of $3.9 million in commissions and expenses) from the sale of 4,433,46816,447,645 shares of our common stock with anat a weighted average fair value of $19.13$11.86 per share pursuant tounder the registration statement on Form S-3 (File No. 333-251149) filed with the SEC on December 4, 2020 (the “December 20202022 ATM Offering”).Offering. With the sale and issuance of these shares, and of the shares previously sold and issued during the year ended December 31, 2020, all $200$500.0 million in shares of our common stock registeredavailable for sale under the December 2020 Registration Statement2022 ATM Offering had been issued and we completed the December 2020 ATM Offering. Under the terms of the December 2020 ATM Offering, only shares of our common stock were issued.
As of October 15, 2020, the Company and H.C. Wainwright entered into the first amendment to the Sales Agreement (the “First Amendment to the Sales Agreement”). Pursuant to the First Amendment to the Sales Agreement, the Company sold, through H.C. Wainwright as its sales agent, $100.0 million in shares of the Company’s common stock in an at-the-market offering (the “October 2020 ATM Offering”). The Company paid H.C. Wainwright a commission of up to 3.0% of the aggregate gross proceeds the Company received from all sales of its common stock in the October 2020 ATM Offering.
2019 ATM Offering
During the year ended December 31, 2020, we received net proceeds of approximately $257.5 million (after deducting $7.3 million in commissions and expenses) from sales of 49,932,051 shares of its common stock, no par value, at a weighted average gross sales price of $5.30 per share pursuant to an At-The-Market Sales Agreement, dated effective as of May 24, 2019, as amended (the “2019 ATM Sales Agreement”), with its sales agent, H.C. Wainwright & Co., LLC (“Wainwright”).
For a more detailed discussion of our At-the-Market Equity Offerings, see Note 12, “Stockholders’ Equity”, to our Consolidated Financial Statements for the fiscal years ended December 31, 2021, 2020 and 2019, beginning on page F-37 of this Annual Report on Form 10-K/A.
Legal Proceedings
The Company hasWe have been named a defendant in several class action and other investor related lawsuits as more fully described in Part I, Item 3., “Legal Proceedings”, of this Annual Report on Form 10-K/A.Note 17. Commitments and Contingencies to our Consolidated Financial Statements. While the Company maintainswe maintain policies of insurance, such policies may not cover all of 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.
Operating Activities
Net cash used in operating activities was $86.4 million duringFor the year ended December 31, 2021. Cash2023, net cash provided by operating activities was consumed$33.1 million, which primarily consisted of net cash inflows of $174.3 million due to changes in operating assets and liabilities, including proceeds of $176.2 million from operationsthe sale of Bitcoin, partially offset by net income from non-cash reconciling items of $91.7 million and the consolidated net loss of $49.5 million. The net income from non-cash reconciling items primarily consisted of Bitcoin Mining revenue of $189.0 million and change in fair value of Bitcoin of $184.7 million, partially offset by depreciation and amortization of $252.4 million, which was primarily attributable to the depreciation of our miners.
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For the year ended December 31, 2022, net cash provided by operating activities was $0.5 million, which primarily consisted of net cash inflows of $95.1 million due to changes in operating assets and liabilities, including proceeds of $79.5 million from the sale of Bitcoin, and a net loss of $7.9 million, lessfrom non-cash reconciling items of $108.9$415.0 million, consistingpartially offset by the consolidated net loss of $509.6 million. The net loss from non-cash reconciling items primarily consisted of a realized gain onImpairment of goodwill of $335.6 million, impairment of Bitcoin of $147.4 million, depreciation and amortization of $108.0 million, which was primarily attributable to the sale/exchangedepreciation of long-term investmentour miners, and impairment of $26.3our miners of $55.5 million, partially offset by Bitcoin Mining revenue of $156.9 million and the change in fair value of our derivative asset of $12.1 million, partially offset by stock-based compensation expense of $68.5 million, the impairment of cryptocurrencies of $36.5 million, depreciation and amortization of $26.3 million, an unrealized loss on marketable equity securities of $13.7 million, the issuance of common stock warrants of $1.2 million, and income tax expense of $0.3 million, net of other immaterial items. The change in assets and liabilities of $187.3 million consisted primarily of increased cryptocurrencies of $184.4 million, increased accounts receivable of $4.4 million, increased security deposits of $3.2 million, decreased costs and estimated earnings in excess of billings of $3.3 million, increased prepaid expenses and other current assets of $1.9 million, increased accounts payable and accrued expenses of $13.3 million, change in fair value of future power credits of $1.0 million, increased customer deposits of $6.1 million, decreased deferred revenue of $12.9 million, decreased lease liabilities of $1.7 million and decreased billings in excess of costs and estimated earnings of $0.6$71.4 million.
Net cash used in operating activities was $11.1 million during
Investing Activities
For the year ended December 31, 2020. Cash was consumed from continuing operations by the2023, net loss of $12.7 million, less non-cash items of $12.0 million, consisting of the impairment of our investment in Coinsquare of $9.4 million, depreciation and amortization totaling $4.5 million, stock-based compensation totaling $3.4 million, impairment to our cryptocurrencies of $1.0 million, and amortization of our right of use assets of $0.4 million, partially offset by a $5.2 million realized gain on the sale / exchange of cryptocurrencies, $1.4 million for the reversal of our accrual for the registration rights penalty, and amortization of our license revenue of $0.1 million. Cryptocurrencies increased by $11.8 million and prepaid expenses and other current assets decreased by $0.8 million, offset by, an increase in accounts payable and accrued expenses of $0.9 million and a decrease in our lease liability of $0.4 million.
Net cash used in operating activities was $15.4 million during the year ended December 31, 2019. Cash was consumed from the net loss of $20.3 million, less non-cash items of $14.7 million, including a loss on the issuance of our convertible notes, common stock and warrants of $6.2 million, the change in fair value of our convertible notes and the related warrant liability of $6.8 million, amortization of our right of use assets of $2.3 million, stock-based compensation totaling $0.7 million, impairment to our cryptocurrencies of $0.8 million, an impairment of intangible assets acquired of $0.7 million related to our decision not to pursue our Logical Brokerage business, net of deferred income tax benefit of $0.1 million, and depreciation and amortization totaling $0.1 million, offset by a $1.1 million gain recognized on the deconsolidation of Tess, a $0.9 million gain on the extinguishment of notes, interest and accounts payable, other income of approximately $0.1 million, primarily related to the amortization of our deferred revenue related to our legacy animal health business and a $0.7 million related to the gain from the sale of cryptocurrencies. Cryptocurrencies increased by $6.6 million, offset by, a decrease in our lease liability of $2.3 million and a decrease in accounts payable and accrued expenses of $0.8 million.
Investing Activities
Net cash used in investing activities during the year ended December 31, 2021 was $490.3$414.8 million, which primarily consistingconsisted of deposits paid on equipment of $274.8$230.4 million, our acquisitionwhich was primarily related to the purchase of Whinstone of $40.9 million, net, our acquisition of ESS Metron of $29.6 million, net,new miners, and purchases of property and equipment of $147.1$193.7 million, partially offset by proceedswhich was primarily related to the development of $1.8 million received for our Coinsquare investment.the Corsicana Facility and the now complete expansion of the Rockdale Facility.
Net
For the year ended December 31, 2022, net cash used in investing activities during the year ended December 31, 2020 was $32.8$354.9 million, consistingwhich primarily consisted of proceeds received from the sale of cryptocurrencies of $8.3 million and proceeds received from the sale of property and equipment of $0.1 million, partially offset by deposits paid on equipment of $33.1$194.9 million, which was primarily related to the purchase of new miners, and purchases of property and equipment of $8.1 million.$148.4 million, which was primarily related to the expansion of the Rockdale Facility.
Net cash used in investing activities during
Financing Activities
For the year ended December 31, 2019 was $3.2 million, consisting of proceeds from the sale of cryptocurrencies of $3.2 million, offset by $5.0 million for the purchase of Bitmain S17-Pro Antminers and deposits on equipment of $1.4 million.
Financing Activities
Net2023, net cash provided by financing activities was $665.6$748.5 million, duringwhich primarily consisted of net proceeds from the issuance of our common stock in connection with our ATM offerings of $761.8 million, partially offset by the repurchase of shares of common stock withheld to satisfy employee withholding taxes of $14.0 million in connection with the settlement of vested equity awards granted under the 2019 Equity Incentive Plan.
For the year ended December 31, 2021,2022, net cash provided by financing activities was $272.3 million, which primarily consisted of net proceeds from the issuance of our common stock in connection with our ATM Offerings of $669.9 million and proceeds received from the exercise of common stock warrants of $0.8$298.2 million, partially offset by payments on our contingent consideration liability related to the acquisition of Whinstone of $15.7 million and the repurchase of shares of common stock withheld to satisfy employee withholding taxes of $5.1$10.1 million in connection with the settlement of vested equity awards granted under our 2019 Equity Incentive Plan.
Net cash provided by financing activities was $259.9 million during the year ended December 31, 2020, which primarily consisted of net proceeds from the issuance of our common stock in connection with our 2019 ATM Offering of $48.0 million and $209.5 million in connection with our 2020 ATM Offering, and proceeds received from the exercise of common stock warrants of $2.9 million, partially offset by the repurchase of common stock to pay director and employee withholding taxes of $0.4 million.
Net cash provided by financing activities was $25.9 million during the year ended December 31, 2019, which consisted of net proceeds from the issuance of our common stock in connection with our ATM Offering of $23.8 million, the proceeds received from the issuance of Notes and Warrants of $3.0 million in the 2019 Private Financing, partially offset by the repayment of the principal balance related to our agreement with BMSS of $0.9 million, net of the $0.4 million gain recorded on extinguishment of the BMSS balance.
Critical Accounting PoliciesEstimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“GAAP”)GAAP requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with revenue recognition, investments, intangiblevaluing the derivative asset classified under Level 3 fair value hierarchy, determining the useful lives and recoverability of long-lived assets, impairment analysis of fixed assets and finite-lived intangibles, stock-based compensation, and business combinations.the valuation allowance associated with our deferred tax assets.
The Company’sOur financial position, results of operations and cash flows are impacted by the accounting policies the Company haswe have adopted. In order to get a full understanding of the Company’sour financial statements, one must have a clear understanding of the accounting policies employed. A summary of the Company’sour critical accounting policies follows:
Bitcoin
Bitcoin purchased are recorded at cost and Bitcoin awarded to us through our mining activities are accounted for in connection with our revenue recognition policy.
Bitcoin held are accounted for as intangible assets with indefinite useful lives. Bitcoin is measured on a first-in-first-out (“FIFO”). The Company adopted ASU 2023-08 effective January 1, 2023, which requires our Bitcoin to be valued at fair value each reporting period with changes in fair value recorded in net income.
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Prior to the adoption of ASU 2023-08, Bitcoin was measured for impairment whenever indicators of impairment are identified based on the intraday low quoted price of Bitcoin. To the extent an impairment loss was recognized, the loss established the new cost basis of the Bitcoin. Subsequent reversal of impairment losses was not permitted.
Bitcoin is classified on our balance sheet as a current asset due to our ability to sell it in a highly liquid marketplace and our intent to liquidate our Bitcoin to support operations when needed.
Purchases and sales of Bitcoin by us and Bitcoin awarded to us are included within Cash flows from operating activities on the Consolidated Statements of Cash Flows as substantially all of our Bitcoin production is sold within days of being produced, but never more than our production on a monthly basis per our internal policy. The change in fair value of Bitcoin is included in Operating income (expense) on the Consolidated Statements of Operations. During 2024, the Company made a strategic decision to temporarily cease the sales of all its Bitcoin production and instead, increase its Bitcoin holdings. The Company will continue to monitor its cash needs and expects to sell Bitcoin in the future to fund its cash expenditures.
Impairment of long-lived assets
Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Revenue recognition
Bitcoin Mining
We have entered into digital asset mining pools by executing contracts with mining pool operators to provide computing power to the mining pool. Our enforceable right to compensation begins only when, and lasts as long as, we provide computing power to the mining pool operator and is created as power is provided over time. The only consideration due to us relates to the provision of computing power. The contracts are terminable at any time by and at no cost to us, and by the pool operator under certain conditions specified in the contract. Providing computing power in digital asset transaction verification services is an output of our ordinary activities. Providing such computing power is the only performance obligation in our contracts with mining pool operators.
The transaction consideration we receive, if any, is noncash consideration in the form of Bitcoin. Changes in the fair value of the noncash consideration due to form of the consideration (changes in the market price of Bitcoin) are not included in the transaction price and therefore, are not included in revenue. Certain mining pool operators charge fees to cover the costs of maintaining the pool and are deducted from amounts we may otherwise earn and are treated as a reduction to the consideration received. Fees fluctuate and historically have been no more than approximately 2% per reward earned, on average. The terms of the agreements provide that neither party can dispute settlement terms after approximately thirty-five days following settlement. In exchange for providing computing power, we are entitled to either:
● | a Full-Pay-Per-Share payout of Bitcoin based on a contractual formula, which primarily calculates the hash rate provided by us to the mining pool as a percentage of total network hash rate, and other inputs. We are entitled to consideration even if a block is not successfully placed by the mining pool operator. The contract is in effect until terminated by either party. |
● | The consideration is all variable. Because it is probable that a significant reversal of cumulative revenue will not occur and we are able to calculate the payout based on the contractual formula, noncash consideration is estimated and recognized based on the spot price of Bitcoin determined using our principal market for Bitcoin at the inception of each contract. Noncash consideration is measured at fair value at contract inception. Fair value of the crypto asset consideration is determined using the quoted price on our principal market for Bitcoin at the beginning of the contract period at the single bitcoin level (one bitcoin). This amount is recognized in revenue as hash rate is provided. |
● | We transitioned completely to this mining pool type in December 2022 and utilized it for the year ended December 31, 2023. |
Or:
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● | a fractional share of the fixed Bitcoin award the mining pool operator receives (less digital asset transaction fees to the mining pool operator which are immaterial and are recorded as a deduction from revenue) for successfully adding a block to the blockchain based on a proportion of our “scoring hash rate” to the pool’s “scoring hash rate” where the scoring hash rate as defined by the pool is the exponential moving average of the hash power contributed by us or by all pool members combined. Our fractional share of the Bitcoin reward is based on the proportion of computing power we contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm. |
● | Because the consideration to which we expect to be entitled for providing computing power is entirely variable, as well as being noncash consideration, we assess the estimated amount of the variable noncash consideration to which it expects to be entitled for providing computing power at contract inception and subsequently, to determine when and to what extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur once the uncertainty associated with the variable consideration is subsequently resolved (the “constraint”). Only when significant revenue reversal is concluded probable of not occurring can estimated variable consideration be included in revenue. Based on evaluation of likelihood and magnitude of a reversal in applying the constraint, the estimated variable noncash consideration is constrained from inclusion in revenue until the end of the contract term, when the underlying uncertainties have been resolved and number of Bitcoin to which we are entitled becomes known. |
● | Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the mining pool operator successfully places a block (by being the first to solve an algorithm) and we receive confirmation of the consideration it will receive, at which time revenue is recognized based on the spot rate of Bitcoin determined using our principal market for Bitcoin at the time of receipt. |
There is no significant financing component in these transactions, due to the performance obligations and settlement of the transactions being on a daily basis.
Data Center Hosting
In general, we provide power for our data center customers on a variable (sub-metered) basis. A customer pays us variable monthly fees for the specific amount of power utilized at rates specified in each contract, subject to certain minimums. We recognize variable power revenue each month as the uncertainty related to the consideration is resolved, power is provided to our customers, and our customers utilize the power (the customer simultaneously receives and consumes the benefits of our performance).
We have determined that our contracts contain a series of performance obligations which qualify to be recognized under a practical expedient available known as the “right to invoice.” This determination allows variable consideration in such contracts to be allocated to and recognized in the period to which the consideration relates, which is typically the period in which it is billed, rather than requiring estimation of variable consideration at the inception of the contract. We have also determined that the contracts contain a significant financing component because the timing of revenue recognition differs from the timing of invoicing by a period, exceeding one year.
We generate engineering and construction services revenue from the fabrication and deployment of immersion cooling technology for Bitcoin mining customers, for which we bill the customer at a fixed monthly fee or at an hourly rate. For the construction of customer-owned equipment, revenue is recognized upon completion of each phase of the construction project, as defined in each contract. For the construction of assets owned by us but paid for and used by the customer during the term of their data center hosting contract, revenue is recognized on a straight-line basis over the remaining life of the contract. Due to the long-term nature of the hosting contracts, there is a significant financing component in transactions where the customer paid for the construction of assets we own.
Maintenance services include cleaning, cabling, and other services to maintain the customers’ equipment. We bill the customer at a fixed monthly fee or at an hourly rate. Revenue is recognized as these services are provided.
Deferred revenue is primarily from advance payments received and is recognized to revenue in a manner consistent with the service being provided, as described above.
Our primary data center hosting contracts contain Service Level Agreement clauses, which guarantee a certain percentage of time the power will be available to our customer. In the rare case that we may incur penalties under these clauses, we recognize the
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payment as variable consideration and a reduction of the transaction price and, therefore, of revenue, when not in exchange for a good or service from the customer.
Engineering
Substantially all revenue is derived from the sale of custom products built to customers’ specifications under fixed-price contracts with one identified performance obligation. Revenue is recognized over time as performance creates or enhances an asset with no alternative use, and for which we have an enforceable right to receive compensation as defined under the contract.
To determine the amount of revenue to recognize over time, we utilize the cost-to-cost method as management believes cost incurred best represents the amount of work completed and remaining on projects. As the cost-to-cost method is driven by incurred cost, we calculate the percentage of completion by dividing costs incurred to date by the total estimated cost. The percentage of completion is then multiplied by estimated revenue to determine inception-to-date revenue. Approved changes to design plans are generally recognized as a cumulative adjustment to the percentage of completion calculation. Revenue recognized for the period is the current inception-to-date recognized revenue less the prior period inception-to-date recognized revenue. If a contract is projected to result in a loss, the entire contract loss is recognized in the period when the loss was first determined, and any additional losses incurred subsequently are recognized in the subsequent reporting periods as they are identified. Additionally, contract costs incurred to date and expected total contract costs are continuously monitored during the term of the contract.
Changes in the job performance, job conditions and final contract settlements are factors that influence management’s assessment of total contract value and the total estimated costs to complete those contracts, and therefore, profit and revenue recognition. Any costs to obtain a contract are not material to our financial statements and would be expensed as incurred. Because of the inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term. The length of time for us to complete a custom product varies but is typically between four to 12 weeks.
Customers are typically required to make periodic progress payments to us based on contractually agreed-upon milestones. Invoices are due net, 30 days, and retainage, if any, is generally due 30 days after delivery. Taxes collected from customers and remitted to governmental authorities are excluded from revenue. Shipping and handling costs are treated as fulfillment costs and are included in cost of sales.
Fair value of financial instruments
The Company accounts forWe recognize financial instruments under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, Fair Value Measurements (“ASC 820”). This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements, ASC 820 establishes athe following fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
Level 1 — quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 — observable inputs other than Level 1, quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and model-derived prices whose inputs are observable or whose significant value drivers are observable; and
Level 3 — assets and liabilities whose significant value drivers are unobservable.
Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on the Company’sour market assumptions. Unobservable inputs require significant management judgment or estimation. In some cases, the inputs used to measure an asset or liability may fall into different levels of the fair value hierarchy. In those instances, the fair value measurement is required to be classified using the lowest level of input that is significant to the fair value measurement. Such determination requires significant management judgment. As of December 31, 2021, the Company had derivative assets and contingent consideration liability measured at fair value. As of December 31, 2020, there were no financial assets or liabilities measured at fair value. The carrying amounts of the Company’sour financial assets and liabilities, such as cash and cash equivalents, and accounts payable, approximate fair value due to the short-term nature of these instruments.
Cryptocurrencies46
Cryptocurrencies (primarily Bitcoin) are included in current assets in the accompanying consolidated balance sheets. The classificationTable of cryptocurrencies as a current asset has been made after the Company’s consideration of the significant consistent daily trading volume on readily available cryptocurrency exchanges, there are no limitations or restrictions on Company’s ability to sell Bitcoin and the pattern of actual sales of Bitcoin by the Company. Cryptocurrencies purchased are recorded at cost and cryptocurrencies awarded to the Company through its mining activities are accounted for in connection with the Company’s revenue recognition policy disclosed below.Contents
Cryptocurrencies held are accounted for asFinite-lived intangible assets with indefinite useful lives. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the cryptocurrency at the time its fair value is being measured. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted.
Purchases of cryptocurrencies by the Company are included within investing activities in the accompanying consolidated statements of cash flows, while cryptocurrencies awarded to the Company through its mining activities are included within operating activities on the accompanying consolidated statements of cash flows. The sales of cryptocurrencies are included within investing activities in the accompanying consolidated statements of cash flows and any realized gains or losses from such sales are included in other income (expense) in the consolidated statements of operations. The Company accounts for its gains or losses in accordance with the first in first out (FIFO) method of accounting.
Investment in marketable equity securities
Our investment in marketable equity securities consists entirely of common shares of Mogo, Inc. (NASDAQ: MOGO), resulting from the April and May 2021 transactions. (See Note 7, “Investments in Marketable Equity Securities”). The Company accounted for this investment in accordance with ASC 321, Investments-Equity Securities, (“ASC 321”) due to the shares having a readily determinable fair value since they are traded on NASDAQ and have significant average daily volume traded. As a result, the investment is required to be measured at fair value at each balance sheet date with unrealized holding gains and losses recorded in other income (expense).
Impairment of long-lived assets
Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Leases
Effective January 1, 2019, the Company accounts for its leases under ASC 842, Leases (“ASC 842”). Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases, and are recorded on the consolidated balance sheet as both a right of use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right of use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right of use asset result in straight-line rent expense over the lease term.
As of December 31, 2021, the Company leases its primary office locations, which expire between 2.5 and seven years, manufacturing facilities of ESS Metron, which expire between 3.5 and 10 years and a ground lease at the Whinstone Facility that expires in December 2030, all of which are inclusive of extension options the Company is reasonably certain will be exercised. At December 31, 2020, the Company did not have any significant operating lease balances.
In November 2021, the Company entered into a lease termination agreement with the landlord of certain Whinstone abandoned leases for approximately $0.9 million. After eliminating the associated operating lease liabilities, we recognized other income of approximately $0.7 million during the year ended December 31, 2021.
The Company also terminated two former operating leases during the year ended December 31, 2020: (i) the lease of the Oklahoma facility and (ii) the Florida lease, both of which are discussed under “Prior Leases” above.
In calculating the right of use asset and lease liability, the Company elects to combine lease and non-lease components as permitted under ASC 842. The Company excludes short-term leases having initial terms of 12 months or less from the new guidance as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term.
Revenue Recognition
Mining
The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers. The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
● Step 1: Identify the contract with the customer;
● Step 2: Identify the performance obligations in the contract;
● Step 3: Determine the transaction price;
● Step 4: Allocate the transaction price to the performance obligations in the contract; and
● Step 5: Recognize revenue when the Company satisfies a performance obligation.
In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met: The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).
If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:
Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.
The Company has entered into digital asset mining pools by executing contracts, as amended from time to time, with the mining pool operators to provide computing power to the mining pool. The contracts are terminable at any time by either party and the Company’s enforceable right to compensation only begins when the Company provides computing power to the mining pool operator. In exchange for providing computing power, the Company is entitled to a fractional share of the fixed cryptocurrency award the mining pool operator receives (less digital asset transaction fees to the mining pool operator which are immaterial and are recorded as a deduction from revenue), for successfully adding a block to the blockchain. The terms of the agreement provide that neither party can dispute settlement terms after thirty-five days following settlement. The Company’s fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm.
Providing computing power to solve complex cryptographic algorithms in support of the Bitcoin blockchain (in a process known as “solving a block”) is an output of the Company’s ordinary activities. The provision of providing such computing power is the only performance obligation in the Company’s contracts with mining pool operators. The transaction consideration the Company receives, if any, is noncash consideration, which the Company measures at fair value on the date received, which is not materially different than the fair value at contract inception or the time the Company has earned the award from the pools. The consideration is all variable. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the mining pool operator successfully places a block (by being the first to solve an algorithm) and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized. There is no significant financing component in these transactions.
Fair value of the cryptocurrency award received is determined using the market rate of the related cryptocurrency at the time of receipt.
Hosting
In general, we provide power for our data center customers on a variable (sub-metered) basis. A customer pays us variable monthly fees for the specific amount of power utilized at rates specified in each contract, subject to certain minimums. We recognize variable power revenue each month as the uncertainty related to the consideration is resolved, power is provided to our customers, and our customers utilize the power (the customer simultaneously receives and consumes the benefits of the Company’s performance).
We have determined that our contracts contain a series of performance obligations which qualify to be recognized under a practical expedient available known as the “right to invoice.” This determination allows variable consideration in such contracts to be allocated to and recognized in the period to which the consideration relates, which is typically the period in which it is billed, rather than requiring estimation of variable consideration at the inception of the contract. We have also determined that the contracts contain a significant financing component because the timing of revenue recognition differs from the timing of invoicing by a period, exceeding one year.
The Company also installs certain hosted customers’ mining equipment and bills the customer at a fixed fee per piece of equipment or at an hourly rate. Revenue is recognized upon completion of the installation.
We generate engineering and construction services revenue from the fabrication and deployment of immersion cooling technology for Bitcoin mining customers. We bill the customer at a fixed monthly fee or at an hourly rate. For the construction of customer-owned equipment, revenue is recognized upon completion of each phase of the construction project, as defined in each contract. For construction of assets owned by Whinstone but paid for and used by the customer during the term of their hosting contract, revenue is recognized on a straight-line basis over the remaining life of the contract.
Maintenance services include cleaning, cabling and other services to maintain the customers’ equipment. We bill the customer at a fixed monthly fee or at an hourly rate. Revenue is recognized as these services are provided.
Deferred revenue is primarily from advance payments received and is recognized on a straight-line basis over the remaining life of the contract or upon completion of the installation of the customers’ equipment.
Our primary hosting contracts contain Service Level Agreement clauses, which guarantee a certain percentage of time the power will be available to our customer. In the rare case that we may incur penalties under these clauses, we account for payments made to customers in accordance with ASC 606-10-32-25, Consideration Payable to a Customer, which requires the payment be recognized as variable consideration and a reduction of the transaction price and, therefore, of revenue, when not in exchange for a good or service from the customer.
Engineering
Substantially all revenue is derived from the sale of custom products built to customers’ specifications under fixed-price contracts with one identified performance obligation. 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.
To determine the amount of revenue to recognize over time, the Company utilizes the cost-to-cost method as management believes cost incurred best represents the amount of work completed and remaining on projects. As the cost-to-cost method is driven by incurred cost, the Company calculates the percentage of completion by dividing costs incurred to date by the total estimated cost. The percentage of completion is then multiplied by estimated revenues to determine inception-to-date revenue. Approved changes to design plans are generally recognized as an adjustment to the percentage of completion calculation on a catch-up basis. Revenue recognized for the period is the current inception-to-date recognized revenue less the prior period inception-to-date recognized revenue. If a contract is projected to result in a loss, the entire contract loss is recognized in the period when the loss was first determined, and the amount of the loss is updated in subsequent reporting periods. Additionally, contract costs incurred to date and expected total contract costs are continuously monitored during the term of the contract.
Changes in the job performance, job conditions and final contract settlements are factors that influence management’s assessment of total contract value and the total estimated costs to complete those contracts, and therefore, profit and revenue recognition. Any costs to obtain a contract are not material to the Company’s financial statements and would be expensed as incurred. Because of the inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term. The length of time for the Company to complete a custom product varies but is typically between four to 12 weeks.
Customers are typically required to make periodic progress payments to the Company based on contractually agreed-upon milestones. Invoices are due net, 30 days, and retainage, if any, is generally due 30 days after delivery. Taxes collected from customers and remitted to governmental authorities are excluded from revenue. Shipping and handling costs are treated as fulfillment costs and are included in cost of sales.
Other Revenue
Other revenue is revenue recognized from an upfront license fee generated from our legacy animal health business. The upfront fee was recorded as deferred revenue and is being amortized into revenue over the term of the License Agreement.
Derivative Accounting
Power Supply Contract and Demand Response Services
In May 2020, Whinstone entered into a Power Supply Agreement with TXU Energy Retail Company LLC (“TXU”) to provide the delivery of a fixed amount of electricity by TXU to Whinstone (via the facility owned by Oncor Electric Delivery Company, LLC (“Oncor”)) for a fixed price through April 30, 2030. The Power Supply Agreement provides a consistent and sufficient supply of electricity at the Whinstone Facility. If Whinstone uses more electricity than contracted, the cost of the excess is incurred at the current spot rate. Concurrently, Whinstone entered into a contract with Oncor for the extension of delivery system transmission/substation facilities to facilitate delivery of the electricity to the Whinstone Facility (the “Facilities Agreement”). Power costs incurred under this contract are determined on an hourly basis using settlement information provided by the Electric Reliability Council of Texas (“ERCOT”) and are recorded in cost of revenues - data center hosting in our consolidated statements of operations.
The demand response services program (“Demand Response Service”) provides the ERCOT market with valuable reliability and economic services by helping to preserve system reliability, enhancing competition, mitigating price spikes, and encouraging the demand side of the market to respond better to wholesale price signals. In collaboration with market participants such as the Company, ERCOT has developed demand response products and services for customers that have the ability to reduce or modify electricity use in response to instructions or signals. Market participants with electrical loads like Whinstone may participate in the Demand Response Service program directly by offering their electrical loads into the ERCOT markets, or indirectly by voluntarily reducing their energy usage in response to increasing wholesale prices.
While we manage operating costs at the Whinstone Facility in part by periodically selling unused or uneconomical power in the market back to ERCOT, we do not consider such actions trading activities. That is, we do not engage in speculation in the power market as part of our ordinary activities. Because the Demand Response Services programs allow for net settlement, we have determined the Power Supply Agreement meets the definition of a derivative under ASC 815, Derivatives and Hedging, (“ASC 815”). However, because we have the ability to sell the power back to the grid rather than take physical delivery, physical delivery is not probable through the entirety of the contract and therefore, we do not believe the normal purchases and normal sales scope exception applies to the Power Supply Agreement. Accordingly, the Power Supply Agreement (the non-hedging derivative contract) is recorded at estimated fair value each reporting period with the change in the fair value recorded in change in fair value of derivative asset in the consolidated statements of operations.
In February 2021, the State of Texas experienced an extreme and unprecedented winter weather event that resulted in prolonged freezing temperatures and caused an electricity generation shortage that was severely disruptive to the whole state. While demand for electricity reached extraordinary levels due to the extreme cold, the supply of electricity significantly decreased in part because of the inability of certain power generation facilities to supply electric power to the grid. Due to the extreme market price of electricity during this time, at the request of ERCOT, Whinstone stopped supplying power to its customers and instead sold power back to the grid.
In April 2021, under the provisions of the TXU Power Supply Agreement, and as a result of the weather event, Whinstone entered into a Qualified Scheduling Entity (“QSE”) Letter Agreement, which resulted in Whinstone being entitled to receive approximately $125.1 million for its power sales during the February winter storm, all under the terms and conditions of the QSE Letter Agreement. Whinstone received cash of $29.0 million in April 2021 (after deducting $10.0 million in power management fees owed by Whinstone), approximately $59.7 million is scheduled to be credited against future power bills of Whinstone beginning in 2022 and the remaining $26.3 million is contingent upon ERCOT’s future remittance. These amounts are gross before fair value adjustments and expenses incurred by Whinstone for power management fees noted above and customer settlements. The fair value of the settlement agreement was estimated and recognized as an asset as part of acquisition accounting. Additionally, pursuant to the Northern Data stock purchase agreement, the Company agreed to pay Seller additional consideration in cash in the amount of the future power credits, net of income taxes, when and if realized by Whinstone. See Note 4, “Acquisitions”.
Business Combinations
The Company applies the provisions of ASC Topic 805, Business Combinations, (“ASC 805”) in the accounting for acquisitions of businesses. ASC 805 requires us to use the acquisition method of accounting by recognizing the identifiable tangible and intangible assets acquired and liabilities assumed, and any non-controlling interest in the acquired business, measured at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the aforementioned amounts. Contingent consideration is included within the purchase price and is recognized at its fair value on the acquisition date. A liability resulting from contingent consideration is remeasured to fair value as of each reporting date until the contingency is resolved, and subsequent changes in fair value are recognized in earnings. Contingent consideration is recorded in long-term liabilities in our consolidated balance sheets.
While we use our best estimates and assumptions to accurately apply preliminary values to assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, these estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of the assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in our consolidated statements of operations.
Accounting for business combinations requires management to make significant estimates and assumptions, especially at the acquisition date, including estimates for intangible assets, contractual obligations assumed, pre-acquisition contingencies, and contingent consideration, where applicable. Although we believe the assumptions and estimates we have made have been reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain of the intangible assets we have acquired include; future expected cash flows from customer contracts, discount rates, and estimated market changes in the value of the Power Supply Agreement, which is accounted for as a nonhedged derivative contract. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates, or actual results.
Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.
Goodwill and Other Intangible Assets
Goodwill represents the cost of a business acquisition in excess of the fair value of the net assets acquired. The Company determined that it has three reporting units for goodwill impairment testing purposes, Bitcoin Mining, Data Center Hosting, and Electrical Products and Engineering, which is consistent with internal management reporting and management’s oversight of operations. Goodwill is not amortized and is reviewed for impairment annually as of December 31 or more frequently if facts and circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. We use both qualitative and quantitative analyses in making this determination. Our analyses require significant assumptions and judgments, including assumptions about future economic conditions, revenue growth, and operating margins, among other factors. Example events or changes in circumstances considered in the qualitative analysis, many of which are subjective in nature, include: a significant negative trend in our industry or overall economic trends, a significant change in how we use the acquired assets, a significant change in or our business strategy, a significant decrease in the market value of the asset, a significant change in regulations or in the industry that could affect the value of the asset, and a change in segments. If it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company performs the quantitative test to identify and measure the amount of goodwill impairment loss. The Company compares the fair value of the reporting unit with its carrying amount. If the carrying amount exceeds the fair value, goodwill of the reporting unit is considered impaired and that excess is recognized as a goodwill impairment loss.
Intangible assets with finite lives are comprised of customer contracts, trademarks, UL Listings, and patents that are amortized on a straight-line basis over their expected useful lives, which is their contractual term. The Company performsterm or estimated useful life. Patents costs consisting of filing and legal fees incurred are initially recorded at cost. Certain patents are in the legal application process and therefore are not currently being amortized. We perform assessments to determine whether finite-lived classification is still appropriate at least annually. The carrying value of finite-lived assets and their remaining useful lives are also reviewed at least annually to determine if circumstances exist which may indicate a potential impairment or revision to the amortization period. A finite-lived intangible asset is considered to be impaired if its carrying value exceeds the estimated future undiscounted cash flows to be derived from it. We exercise judgment in selecting the assumptions used in the estimated future undiscounted cash flows analysis. Impairment is measured by the amount that the carrying value exceeds fair value.
SegmentThe use of different estimates or assumptions could result in significantly different fair values for our reporting units and Reporting Unit Informationintangible assets.
Operating segments
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. A committee consistingOur CODM is comprised of several members of our executive management team who use revenue and cost of revenue of our three reporting segments to assess the performance of the Company’s executives is determined to be the CODM. The Company has threebusiness of our reportable operating segments as of December 31, 2021. See Note 18, “Segment Information”.segments.
Stock Based CompensationStock-based compensation
The Company accountsWe account for share-based payment awards exchanged for services at the estimated grant date fair value of the award. Stock options issued underaward, which is based on the Company’s equity incentive plans are granted with an exercise price equal to no less than thefair market pricevalue of the Company’sour common stock at the datetime of grantthe grant. For performance-based share-based payment awards, we recognize compensation cost over the performance period when achievement of the milestones and expire up to ten years from the date of grant. These options generally vest on the grant date or over a one- year period.targets is probable.
The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment.
Expected Term - The expected term of options represents the period that the Company’s stock-based awards are expected to be outstanding based on the simplified method, which is the half-life from vesting to the end of its contractual term.
Expected Volatility - The Company computes stock price volatility over expected terms based on its historical common stock trading prices.
Risk-Free Interest Rate - The Company bases the risk-free interest rate on the implied yield available on U. S. Treasury zero-coupon issues with an equivalent remaining term.
Expected Dividend - The Company has never declared or paid any cash dividends on its common shares and does not plan to pay cash dividends in the foreseeable future, and, therefore, uses an expected dividend yield of zero in its valuation models.
The CompanyWe have elected to account for forfeitedforfeitures of awards as they occur, as permitted by Accounting Standards Update (“ASU”) 2016-09. Ultimately, the actual expenses recognized over the vesting period will be for those shares that vested.occur.
Earnings (loss) per share
Basic net earnings (loss) per share (“EPS”) of common stock is computed by dividing the Company’s net earnings (loss) 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 the unvested restricted share units (RSUs) awarded to its employees, officers, directors, and contractors under the 2019 Equity Plan from this net loss per share calculation because including them would be antidilutive.
Recently issued and adopted accounting pronouncements
The CompanyWe continually assessesassess any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company’sour financial reporting, the Company undertakeswe undertake a review to determine the consequences of the change to itsour financial statements and believesbelieve that there are proper controls in place to ascertain that the Company’sour financial statements properly reflect the change.
We have considered recently issued accounting pronouncements and do not believe the adoption of such pronouncements will have a material impact on our consolidated financial statements.
See Note 32. Significant Accounting Policies and Recent Accounting Pronouncements to our financial statements beginning on page F-9 of this Form 10-K/AConsolidated Financial Statements for a description of applicable recent accounting pronouncements applicable toand any material impact on our financial statements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.RISK
The following discussion about our market risk exposures involves forward-looking statements. Actual results could differ materially from those projected in theour forward-looking statements. For more information regarding the forward-looking statements used in this section and elsewhere in this Annual Report, see the Cautionary“Cautionary Note Regarding Forward-Looking StatementsStatements” at the forepart of this Annual Report.
Risk Regarding the Price of Bitcoin.Bitcoin.
Our business and development strategy is focused on maintaining and expanding our Bitcoin Mining operations to maximize the amount of new Bitcoin rewards we earn. AtAs of December 31, 2021,2023, we held 4,8847,362 Bitcoin with a carryingthat was recognized at its fair value of $159.5 million, all of which$311.2 million. All Bitcoin held were produced from our Bitcoin miningMining operations. The carrying value
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As discussed in Note 3. “Basis of Presentation, Summary of Significant Accounting Policies and Recent Accounting Pronouncements” of the Notes to Consolidated Financial Statements disclosed under Part II, Item 8. “Financial Statements and Supplementary Data” of this Annual Report, under the heading “Cryptocurrencies” on page F-16 below, we account for our Bitcoin assets as indefinite-lived intangible assets, which are recorded at fair value as of the receipt, subject to impairment testing following their receipt. If the fair value of a Bitcoin asset has declined and we determine that impairment of that Bitcoin asset is appropriate, we record an impairment charge and the carrying value of the Bitcoin asset is reduced. Once an impairment charge has been assessed against the fair value of a Bitcoin asset, its carrying value cannot be recovered to reflect subsequent increases in fair value.
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 Bitcoinwhich will affect the revenue from our operations, and any future impairment ofdeclines in the fair value of the Bitcoin we mine and hold for our account would be reported in our financial statements and results of operations as chargesa charge against net income, which could have a material adverse effect on the market price for our securities.
A 10% increase or decrease in both the price of Bitcoin produced during the year ended December 31, 2023 and the fair value of Bitcoin as of December 31, 2023, would have increased or decreased net income by approximately $48.9 million.
A 10% increase or decrease in future power prices at December 31, 2023, would have increased or decreased net income by approximately $43.2 million.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.DATA
* Deloitte & Touche LLP, PCAOB Firm ID No. 34
49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID 688)
To the stockholders and the Board of Directors of Riot Platforms, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Riot Platforms, Inc. and subsidiaries (the "Company") as of December 31, 2023, the related consolidated statement of operations, comprehensive income (loss), stockholders' equity, and cash flows, for the year ended December 31, 2023 and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and the results of its operations and its cash flows for the year ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2024, expressed an unqualified opinion on the Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for Bitcoin to fair value, with changes in fair value recognized in net income, effective as of January 1, 2023 due to the adoption of Accounting Standards Update (“ASU”) No. 2023-08, Intangibles-Goodwill and Other-Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets (“ASU 2023-08”).
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Bitcoin Mining Revenue – Refer to Notes 2 and 4 to the financial statements
Critical Audit Matter Description
The Company participates in a digital asset mining pool ("the mining pool”) by providing computing power to the mining pool operator. The Company recognizes revenue as they fulfill their performance obligation over time by providing computing power in exchange for bitcoin. Once the computing power is transferred to the mining pool operator, the mining pool operator will compensate
F-1
the Company for the computing power provided with a payout in bitcoin. For the years ended December 31, 2023, and 2022, Bitcoin Mining Revenue was $189.0 million, and $156.9 million, respectively.
We identified the auditing of bitcoin mining revenue as a critical audit matter due to the extent of audit effort required to perform audit procedures over the Company’s computing power provided to the mining pool operator, the associated contractual payouts including the blockchain contractual inputs, the Company’s valuation of bitcoin received from the mining pool operator, and evaluating the results of those procedures.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company’s process for recording bitcoin mining revenue included the following, among others:
● | With the assistance of our Information Technology (IT) specialists, we identified the significant systems used to monitor computing power and tested the general IT controls over each of these systems. |
● | We tested the effectiveness of controls over the Company’s mining revenue calculation. |
● | We tested the amount of the mining revenue recorded by developing an expectation for the amount recorded based on the computing power provided to the mining pool operator per the calculation prescribed in the contract with the mining pool operator and comparing our expectation to the amount recorded by the Company. |
● | We confirmed with the mining pool operator the significant contractual terms utilized in the determination of mining revenue, total mining rewards earned, and the digital asset wallet addressesin which the rewards are deposited. |
● | We utilized our proprietary audit tool to independently obtain evidence from the Bitcoin blockchain to test the occurrence and accuracy of mining revenue. |
● | With the assistance of our fair value specialists, we evaluated the reasonableness of the prices utilized by the Company to value bitcoin by obtaining independent bitcoin prices and comparing those to the prices selected by the Company. |
/s/ DELOITTE & TOUCHE LLP
Houston, TX
February 22, 2024
We have served as the Company’s auditor since 2023.
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Riot Blockchain,Platforms, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheetssheet ofRiot Blockchain,Platforms, Inc. and Subsidiaries (the “Company”) as of December 31, 2021 and 2020,2022, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the threetwo years in the period endedDecember 31, 2021,2022, and the related notes (collectively(collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020,2022, and the results of its operations and its cash flows for each of the threetwo years in the period ended December 31, 2021,2022, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company’s internal control over financial reporting as of December 31, 2021, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013 and our report dated March 16, 2022, expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of the existence of material weaknesses.
Basis for Opinion
These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company’sCompany's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
F-1
Evaluation of the Accounting for and Disclosure of Cryptocurrencies Held
As disclosed in Note 3 to the consolidated financial statements, the Company’s digital assets held as of December 31, 2021, which mainly consist of Bitcoin, are accounted for as indefinite-lived intangible assets, and have been included in current assets on the consolidated balance sheet. The Company’s cryptocurrencies as of December 31, 2021 were approximately $158.2 million. The Company’s management has exercised significant judgment in their determination of how existing accounting principles generally accepted in the United States of America (“GAAP”) should be applied to the accounting for cryptocurrencies held, the associated financial statement presentation and accompanying footnote disclosures.
We identified the accounting for and disclosure of cryptocurrencies held as a critical audit matter due to the nature and extent of audit effort required to obtain sufficient appropriate audit evidence to address the risks of material misstatement related to the existence and rights and obligations of cryptocurrencies held. The nature and extent of audit effort required to address the matter included significant involvement of more experienced engagement team members and discussions and consultations with subject matter experts related to the matter. In addition, the accounting for cryptocurrencies held involves the Company’s information technology (“IT”) environment as such assets are held in digital cold storage wallets.
The primary procedures we performed to address this critical audit matter included the following:
•
Evaluated the design and effectiveness of certain internal controls over the Company’s digital cold storage wallets with the assistance of our IT professionals;
•
Performed an observation of the Company’s digital cold storage wallets;
•
Evaluated management’s rationale for the application of Accounting Standards Codification (“ASC”) 350 to account for its cryptocurrencies held, including management’s processes for evaluating its cryptocurrencies for impairment;
•
Evaluated management’s rationale for the inclusion of cryptocurrencies as a current asset on the balance sheet with the assistance of our internal valuation specialists;
•
Evaluated management’s disclosures of its cryptocurrency activity in the financial statement footnotes; and
•
Examined supporting sale and cash receipt evidence for cryptocurrency sales, including management’s processes for calculating any gains on sales of cryptocurrencies.
Evaluation of the Accounting for and Disclosure of Cryptocurrency Mining Revenue Recognized
As disclosed in Note 3, the Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers. The Company provides computing power services to a digital asset mining pool (the “Pool”) and has executed a contract with the Pool operator to provide computing power to the Pool. The contract, as amended, is terminable at any time by either party and the Company’s enforceable right to compensation only begins when the Company provides computing power to the Pool. In exchange for providing computing power, the Company is entitled to a fractional share of the fixed cryptocurrency award the Pool operator receives for successfully adding a block to the blockchain, plus a fractional share of the transaction fees attached to that block. The Company’s fractional share is based on the proportion of computing power the Company contributed to the Pool as compared to the total computing power contributed by the Pool participants in solving the current algorithm. The contract between the Company and the Pool also specifies that both parties waive any rights, claims or notices to revise or adjust any of the amounts of fractional share of the fixed cryptocurrency awarded to the Company after 35 days of the date of any cryptocurrency award. During the year ended December 31, 2021, the Company recognized net cryptocurrency mining revenue of approximately $184.4 million. The Company’s management has exercised significant judgment in their determination of how existing GAAP should be applied to the accounting for and disclosure of cryptocurrency mining revenue recognized. In addition, a significant portion of the Company’s cryptocurrency mining hardware that provides computing power to the Pool is currently hosted at a third party facility. As such, the overall accounting for and disclosure of cryptocurrency mining revenue recognized involved the IT environment of both the Company and the third party hosting facility.
We identified the accounting for and disclosure of cryptocurrency mining revenue recognized as a critical audit matter due to the complexities involved in auditing completeness and occurrence of the revenue recognized by the Company, particularly in light of material weakness identified in the design and effectiveness of certain internal controls over the IT environment for certain financially relevant systems.
F-2
The primary procedures we performed to address this critical audit matter included the following:
•
Evaluated the design and effectiveness of IT general controls over the Company’s IT environment and key financially relevant systems. We also performed similar procedures over the IT environment of the third party hosting facility;
•
Performed a site visitation of the facilities where the Company’s mining hardware is located, which included an observation of the physical and environmental controls and mining equipment inventory observation procedures;
•
On a sample basis testing the hashing power contributed by the Company’s mining hardware;
•
Evaluated management’s rationale for the application of ASC 606 to account for its cryptocurrency awards earned, which included evaluating the provisions of the contract between the Company and the Pool;
•
Evaluated management’s disclosures of its cryptocurrency activity in the financial statement footnotes;
•
Evaluated and tested management’s rationale and supporting documentation associated with the valuation of cryptocurrency awards earned;
•
Independently confirmed certain financial and performance data directly with the blockchain network and the Pool;
•
Compared the Company’s digital cold storage wallet records to publicly available blockchain records; and
•
Performed certain substantive analytical procedures to determine completeness and occurrence of digital assets earned by the Company as consideration for services rendered.
Evaluation of the Initial Measurement of Certain Intangible and Derivative Assets Acquired
As disclosed in Note 4 to the consolidated financial statements, during the year ended December 31, 2021 the Company completed acquisitions of Whinstone US, Inc. (“Whinstone”) and Ferrie Franzmann Industries, LLC (d/b/a ESS Metron) (“Metron”). The acquisitions were each accounted for as business combinations in accordance with ASC 805. Under this method of accounting, the Company allocated the fair value of purchase consideration transferred to the tangible and intangible assets acquired and liabilities assumed in each acquisition based on their estimated fair values on the date of acquisition, which included Whinstone and Metron customer relationship intangible assets and a derivative asset pertaining to a Whinstone power supply contract. The determination of the acquisition date fair value of these intangible assets required the Company to evaluate complex GAAP and develop assumptions, including key assumptions regarding forecasted revenues and related growth rates, forecasted operating cash flows, customer attrition rates, and the discount rates.
We identified the initial measurement of the customer relationships intangible assets and power supply derivative asset as a critical audit matter due to the nature and extent of audit effort required to obtain sufficient appropriate audit evidence to address the risks of material misstatement related to the valuation of the intangible and derivative assets. The nature and extent of audit effort required to address the matter included significant involvement of more experienced engagement team members and discussions and consultations with subject matter experts related to the matter.
The primary procedures we performed to address this critical audit matter included the following.
•
Evaluated the design and effectiveness of internal controls over the Company’s accounting for business combinations;
•
Compared the significant assumptions in the prospective financial information, including, but not limited to, the forecasted revenue growth rates, margins, expected annual customer attrition, and the estimated economic life, as appropriate for each calculation to current industry trends, as well as to the historical performance of the acquired businesses;
•
With the assistance of our valuation specialists, evaluated the reasonableness of the valuation methodology, and significant assumptions, including discount rates, utilized in valuing the intangible assets and derivative assets. This included understanding and validating the source information underlying the determination of the discount rates and testing the mathematical accuracy of the calculations;
•
With the assistance of our valuation specialists, developed a range of independent estimates for the discount rates using publicly available market data for comparable entities and comparing those to the discount rates selected by management; and
•
Evaluated the Company’s technical analysis and provisions of the power supply contract in accordance with ASC 815.
/s/ Marcum LLPllp
Marcum LLPllp
We have served as the Company’s auditor since 2019.from 2019 through May 18, 2023.
Los Angeles, CA
March 2, 2023
March 16, 2022
F-3
Riot Blockchain,Platforms, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except for share and per share amounts)
| | | | | | |
| | December 31, | | December 31, | ||
| | 2023 | | 2022 | ||
ASSETS |
| |
|
| |
|
Current assets |
| |
|
| |
|
Cash and cash equivalents | | $ | 597,169 | | $ | 230,328 |
Accounts receivable, net | |
| 24,706 | |
| 26,932 |
Contract assets, including retainage of $3,166 and $3,012, respectively | |
| 15,359 | |
| 19,743 |
Prepaid expenses and other current assets | |
| 29,107 | |
| 32,661 |
Bitcoin | |
| 311,178 | |
| 109,420 |
Derivative asset, current portion | | | 30,781 | | | — |
Future power credits, current portion | |
| 271 | |
| 24,297 |
Total current assets | |
| 1,008,571 | |
| 443,381 |
| | | | | | |
Property and equipment, net | |
| 704,194 | |
| 692,555 |
Deposits | |
| 215,009 | |
| 42,433 |
Finite-lived intangible assets, net | |
| 15,697 | |
| 21,477 |
Derivative asset, less current portion | | | 73,437 | | | 97,497 |
Operating lease right-of-use assets | | | 20,413 | | | 21,673 |
Future power credits, less current portion | |
| 638 | |
| 638 |
Other long-term assets | |
| 13,121 | |
| 310 |
Total assets | | $ | 2,051,080 | | $ | 1,319,964 |
| |
|
| |
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
|
| |
|
|
Current liabilities | |
|
| |
|
|
Accounts payable | | $ | 23,157 | | $ | 18,445 |
Contract liabilities | |
| 4,073 | |
| 8,446 |
Accrued expenses | | | 62,628 | | | 65,464 |
Deferred gain on acquisition post-close dispute settlement | | | 26,007 | | | — |
Deferred revenue, current portion | |
| 2,458 | |
| 2,882 |
Contingent consideration liability - future power credits, current portion | |
| 271 | |
| 24,297 |
Operating lease liability, current portion | |
| 2,421 | |
| 2,009 |
Total current liabilities | |
| 121,015 | |
| 121,543 |
| |
|
| |
|
|
Deferred revenue, less current portion | |
| 15,801 | |
| 17,869 |
Operating lease liability, less current portion | |
| 18,924 | |
| 20,242 |
Contingent consideration liability - future power credits, less current portion | |
| 638 | |
| 638 |
Other long-term liabilities | |
| 6,680 | |
| 8,230 |
Total liabilities | |
| 163,058 | |
| 168,522 |
| |
|
| |
|
|
Commitments and contingencies - Note 17 | |
|
| |
|
|
| |
|
| |
|
|
Stockholders’ equity | |
|
| |
|
|
Preferred stock, no par value, 15,000,000 shares authorized: | |
|
| |
|
|
2% Series A Convertible Preferred stock, 2,000,000 shares authorized; no shares issued and outstanding as of December 31, 2023 and December 31, 2022 | |
| — | |
| — |
0% Series B Convertible Preferred stock, 1,750,001 shares authorized; no shares issued and outstanding as of December 31, 2023 and December 31, 2022 | |
| — | |
| — |
Common stock, no par value; 340,000,000 shares authorized; 230,836,624 and 167,751,112 shares issued and outstanding as of December 31, 2023 and December 31, 2022, respectively | |
| 2,687,692 | |
| 1,907,784 |
Accumulated deficit | |
| (799,820) | |
| (756,342) |
Accumulated other comprehensive income (loss), net | | | 150 | | | — |
Total stockholders’ equity | |
| 1,888,022 | |
| 1,151,442 |
Total liabilities and stockholders’ equity | | $ | 2,051,080 | | $ | 1,319,964 |
| December 31, 2021 |
| December 31, 2020 | |||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 312,315 | $ | 223,382 | ||||
Accounts receivable, net | 15,398 | - | ||||||
Prepaid expenses and other current assets | 7,135 | 1,257 | ||||||
Costs and estimated earnings in excess of billings | 9,862 | - | ||||||
Cryptocurrencies | 159,544 | 11,626 | ||||||
Investments in marketable equity securities, at fair value | 10,804 | - | ||||||
Future power credits, current portion | 58,481 | - | ||||||
Total current assets | 573,539 | 236,265 | ||||||
Property and equipment, net | 276,480 | 10,143 | ||||||
Deposits | 266,170 | 33,093 | ||||||
Long-term investments | 310 | 310 | ||||||
Right of use assets | 13,189 | - | ||||||
Derivative asset | 26,079 | - | ||||||
Intangible assets, net | 14,162 | 336 | ||||||
Goodwill | 335,563 | - | ||||||
Future power credits, less current portion | 25,447 | - | ||||||
Total assets | $ | 1,530,939 | $ | 280,147 | ||||
| ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 20,037 | $ | 718 | ||||
Accrued expenses | 22,071 | 1,582 | ||||||
Billings in excess of costs and estimated earnings | 5,264 | - | ||||||
Deferred revenue, current portion | 2,843 | 97 | ||||||
Operating lease liability, current portion | 1,182 | - | ||||||
Contingent consideration liability - future power credits, current portion | 58,481 | - | ||||||
Total current liabilities | 109,878 | 2,397 | ||||||
| ||||||||
Deferred revenue, less current portion | 19,796 | 679 | ||||||
Operating lease liability, less current portion | 12,257 | - | ||||||
Contingent consideration liability - future power credits, less current portion | 25,447 | - | ||||||
Other long-term liabilities | 6,241 | - | ||||||
Total liabilities | 173,619 | 3,076 | ||||||
| ||||||||
Commitments and contingencies - Note 15 | ||||||||
| ||||||||
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 December 31, 2021 and 2020 | - | - | ||||||
0% Series B Convertible stock, 1,750,001 shares authorized; 2,199 and 4,199 shares issued and outstanding as of December 31, 2021 and 2020, respectively, liquidation preference over common stock, equal to carrying value | 11 | 22 | ||||||
Common stock, no par value; 170,000,000 shares authorized; 116,748,472 and 78,523,517 shares issued and outstanding as of December 31, 2021 and 2020, respectively | 1,595,147 | 506,961 | ||||||
Accumulated deficit | (237,838 | ) | (229,912 | ) | ||||
Total stockholders’ equity | 1,357,320 | 277,071 | ||||||
Total liabilities and stockholders’ equity | $ | 1,530,939 | $ | 280,147 |
See Accompanyingaccompanying Notes to Consolidated Financial Statements.
F-4
Riot Blockchain,Platforms, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except for share and per share amounts)
| | | | | | | | | |
| | | | | | | | | |
| | Years Ended December 31, | |||||||
|
| 2023 | | 2022 | | 2021 | |||
Revenue: | | |
|
| |
|
| |
|
Bitcoin Mining | | $ | 188,996 | | $ | 156,870 | | $ | 184,422 |
Data Center Hosting | |
| 27,282 | |
| 36,862 | |
| 24,546 |
Engineering | |
| 64,303 | |
| 65,342 | |
| 4,178 |
Other revenue | |
| 97 | |
| 97 | |
| 97 |
Total revenue | |
| 280,678 | |
| 259,171 | |
| 213,243 |
| |
|
| |
|
| |
|
|
Costs and expenses: | |
|
| |
|
| |
|
|
Cost of revenue: | | | | | | | | | |
Bitcoin Mining | |
| 96,597 | |
| 74,335 | |
| 45,513 |
Data Center Hosting | |
| 97,122 | |
| 61,906 | |
| 32,998 |
Engineering | |
| 60,614 | |
| 57,455 | |
| 3,582 |
Acquisition-related costs | |
| — | |
| 78 | |
| 21,198 |
Selling, general, and administrative | |
| 100,346 | |
| 67,452 | |
| 87,429 |
Depreciation and amortization | |
| 252,354 | |
| 107,950 | |
| 26,324 |
Change in fair value of Bitcoin | | | (184,734) | | | — | | | — |
Change in fair value of derivative asset | |
| (6,721) | |
| (71,418) | |
| (12,112) |
Power curtailment credits | | | (71,215) | | | (27,345) | | | (6,514) |
Change in fair value of contingent consideration | |
| — | |
| (159) | |
| 975 |
Realized gain on sale of Bitcoin | |
| — | |
| (30,346) | |
| (253) |
Loss (gain) on sale/exchange of equipment | | | 5,336 | | | (16,281) | | | — |
Casualty-related charges (recoveries), net | | | (5,974) | | | 9,688 | | | — |
Impairment of Bitcoin | | | — | | | 147,365 | | | 43,973 |
Impairment of goodwill | | | — | | | 335,648 | | | — |
Impairment of miners | | | — | | | 55,544 | | | — |
Total costs and expenses | |
| 343,725 | |
| 771,872 | |
| 243,113 |
Operating income (loss) | |
| (63,047) | |
| (512,701) | |
| (29,870) |
| |
|
| |
|
| |
|
|
Other income (expense): | |
|
| |
|
| |
|
|
Interest income (expense) | | | 8,222 | | | 454 | | | (296) |
Realized loss on sale of marketable equity securities | | | — | | | (8,996) | | | — |
Realized gain on sale/exchange of long-term investment | |
| — | |
| — | |
| 26,260 |
Unrealized gain (loss) on marketable equity securities | |
| — | |
| — | |
| (13,655) |
Other income (expense) | | | 260 | |
| (59) | |
| 2,378 |
Total other income (expense) | |
| 8,482 | |
| (8,601) | |
| 14,687 |
| |
|
| |
|
| |
|
|
Net income (loss) before taxes | |
| (54,565) | |
| (521,302) | |
| (15,183) |
| |
|
| |
|
| |
|
|
Current income tax benefit (expense) | |
| 48 | |
| (789) | |
| (254) |
Deferred income tax benefit (expense) | |
| 5,045 | |
| 12,538 | |
| — |
Total income tax benefit (expense) | |
| 5,093 | | | 11,749 | | | (254) |
| |
|
| |
|
| |
|
|
Net income (loss) | | $ | (49,472) | | $ | (509,553) | | | (15,437) |
| | | | | | | | | |
Basic and diluted net income (loss) per share | | $ | (0.28) | | $ | (3.65) | | $ | (0.17) |
Basic and diluted weighted average number of shares outstanding | |
| 175,026,051 | |
| 139,433,901 | |
| 93,452,764 |
| Years Ended December 31, | |||||||||||
2021 |
| 2020 | 2019 | |||||||||
Revenue: | ||||||||||||
Revenue, net - mining | $ | 184,422 | $ | 11,984 | $ | 6,741 | ||||||
Revenue, net - hosting | 24,546 | - | - | |||||||||
Revenue, net - engineering | 4,178 | - | - | |||||||||
Other revenue | 97 | 97 | 96 | |||||||||
Total revenue | 213,243 | 12,081 | 6,837 | |||||||||
| ||||||||||||
Costs and expenses: | ||||||||||||
Cost of revenues - mining (exclusive of depreciation and amortization shown below) | 45,513 | 6,251 | 6,097 | |||||||||
Cost of revenues - hosting (exclusive of depreciation and amortization shown below) | 32,998 | - | - | |||||||||
Cost of revenues - engineering | 3,582 | - | - | |||||||||
Acquisition-related costs | 21,198 | - | - | |||||||||
Selling, general and administrative | 87,429 | 10,251 | 9,159 | |||||||||
Depreciation and amortization | 26,324 | 4,494 | 119 | |||||||||
Change in fair value of derivative asset | (18,626 | ) | - | - | ||||||||
Change in fair value of contingent consideration | 975 | - | - | |||||||||
Realized gain on sale/exchange of cryptocurrencies | (253 | ) | (5,184 | ) | (665 | ) | ||||||
Impairment of intangible rights acquired | - | - | 700 | |||||||||
Impairment of long-term investment | - | 9,413 | - | |||||||||
Impairment of cryptocurrencies | 36,462 | 989 | 844 | |||||||||
Total costs and expenses | 235,602 | 26,214 | 16,254 | |||||||||
Operating loss | (22,359 | ) | (14,133 | ) | (9,417 | ) | ||||||
| ||||||||||||
Other income (expense): | ||||||||||||
Loss on issuance of convertible notes, common stock and warrants | - | - | (6,155 | ) | ||||||||
Change in fair value of warrant liability | - | - | (2,869 | ) | ||||||||
Change in fair value of convertible notes | - | - | (3,896 | ) | ||||||||
Reversal of registration rights penalty | - | 1,358 | - | |||||||||
Gain on deconsolidation of Tess | - | - | 1,139 | |||||||||
Gain on sale of equipment | - | 29 | - | |||||||||
Interest income | - | 85 | - | |||||||||
Interest expense | (296 | ) | - | (122 | ) | |||||||
Other income (expense) | 2,378 | (6 | ) | 874 | ||||||||
Realized gain on sale/exchange of long-term investment | 26,260 | - | - | |||||||||
Unrealized loss on marketable equity securities | (13,655 | ) | - | - | ||||||||
Total other income (expense) | 14,687 | 1,466 | (11,029 | ) | ||||||||
| ||||||||||||
Net loss before taxes | (7,672 | ) | (12,667 | ) | (20,446 | ) | ||||||
| ||||||||||||
Current income tax expense | (254 | ) | - | - | ||||||||
Deferred income tax benefit | - | - | 143 | |||||||||
| ||||||||||||
Net loss | (7,926 | ) | (12,667 | ) | (20,303 | ) | ||||||
| ||||||||||||
Net (income) loss attributable to non-controlling interest | - | (7 | ) | 264 | ||||||||
| ||||||||||||
Net loss attributable to Riot Blockchain | $ | (7,926 | ) | $ | (12,674 | ) | $ | (20,039 | ) | |||
| ||||||||||||
Basic and diluted net loss per share | $ | (0.08 | ) | $ | (0.30 | ) | $ | (1.02 | ) | |||
| ||||||||||||
Basic and diluted weighted average number of shares outstanding | 93,452,764 | 41,976,704 | 19,597,977 |
See Accompanyingaccompanying Notes to Consolidated Financial Statements.
F-5
Riot Platforms, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
Riot Blockchain, Inc. and Subsidiaries
| | | | | | | | | |
| | Years Ended December 31, | |||||||
| | 2023 | | 2022 | | 2021 | |||
Net income (loss) | | $ | (49,472) | | $ | (509,553) | | $ | (15,437) |
Other comprehensive income (loss): | | | | | | | | | |
Unrealized holding gains (losses) on convertible note | | | 150 | | | — | | | — |
Comprehensive income (loss) | | $ | (49,322) | | $ | (509,553) | | $ | (15,437) |
See accompanying Notes to Consolidated Financial Statements.
F-6
Riot Platforms, Inc.
Consolidated StatementStatements of Stockholders’ Equity
(in thousands, except for share and per share amounts)
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Accumulated other | | Total | ||
| | Preferred Stock | | Common Stock | | Accumulated | | comprehensive | | stockholders’ | |||||||||
| | Shares |
| Amount |
| Shares |
| Amount |
| deficit |
| income (loss) | | equity | |||||
Balance as of January 1, 2021 |
| 4,199 | | $ | 22 |
| 78,523,517 | | $ | 506,961 | | $ | (231,352) | | $ | — | | $ | 275,631 |
Delivery of common stock underlying restricted stock units, net of shares settled for tax withholding |
| — | |
| — |
| 464,021 | |
| (5,082) | |
| — | | | — | |
| (5,082) |
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 in connection with the acquisition of ESS Metron, net of 70,156 shares withheld |
| — | |
| — |
| 645,248 | |
| 26,735 | |
| — | | | — | |
| 26,735 |
Issuance of common stock/At-the-market offering, net of offering costs |
| — | |
| — |
| 24,344,057 | |
| 669,916 | |
| — | | | — | |
| 669,916 |
Issuance of common stock warrant for settlement of advisory fees |
| — | |
| — |
| — | |
| 1,157 | |
| — | | | — | |
| 1,157 |
Conversion of preferred stock to common stock |
| (2,000) | |
| (11) |
| 2,000 | |
| 11 | |
| — | | | — | |
| — |
Stock option exercise |
| — | |
| — |
| 10,286 | |
| — | |
| — | | | — | |
| — |
Stock-based compensation |
| — | |
| — |
| — | |
| 68,491 | |
| — | | | — | |
| 68,491 |
Net income (loss) |
| — | |
| — |
| — | |
| — | |
| (15,437) | | | — | |
| (15,437) |
Balance as of December 31, 2021 |
| 2,199 | |
| 11 |
| 116,748,472 | |
| 1,595,147 | |
| (246,789) | | | — | |
| 1,348,369 |
Issuance of restricted stock, net of forfeitures and delivery of common stock underlying stock awards, net of tax withholding |
| — | |
| — |
| 13,947,829 | |
| (10,138) | |
| — | | | — | |
| (10,138) |
Issuance of common stock/At-the-market offering, net of offering costs |
| — | |
| — |
| 37,052,612 | |
| 298,209 | |
| — | | | — | |
| 298,209 |
Conversion of preferred stock to common stock |
| (2,199) | |
| (11) |
| 2,199 | |
| 11 | |
| — | | | — | |
| — |
Stock-based compensation |
| — | |
| — |
| — | |
| 24,555 | |
| — | | | — | |
| 24,555 |
Net income (loss) |
| — | |
| — |
| — | |
| — | |
| (509,553) | | | — | |
| (509,553) |
Balance as of December 31, 2022 |
| — | | | — |
| 167,751,112 | | | 1,907,784 | | | (756,342) | | | — | | | 1,151,442 |
Cumulative effect upon adoption of ASU 2023-08 | | — | | | — | | — | | | — | | | 5,994 | | | — | | | 5,994 |
Issuance of restricted stock, net of forfeitures and delivery of common stock underlying stock awards, net of tax withholding |
| — | |
| — |
| 809,302 | |
| (14,035) | |
| — | | | — | |
| (14,035) |
Issuance of common stock/At-the-market offering, net of offering costs |
| — | |
| — |
| 62,206,045 | |
| 761,773 | |
| — | | | — | |
| 761,773 |
Issuance of common stock in connection with acquisition of ESS Metron, LLC |
| — | |
| — |
| 70,165 | |
| — | |
| — | | | — | |
| — |
Stock-based compensation |
| — | |
| — |
| — | |
| 32,170 | |
| — | | | — | |
| 32,170 |
Net income (loss) |
| — | |
| — |
| — | |
| — | |
| (49,472) | | | — | |
| (49,472) |
Other comprehensive income (loss) | | — | | | — | | — | | | — | | | — | | | 150 | | | 150 |
Balance as of December 31, 2023 |
| — | | $ | — |
| 230,836,624 | | $ | 2,687,692 | | $ | (799,820) | | $ | 150 | | $ | 1,888,022 |
Preferred Stock | Common Stock | Accumulated | Total Riot Blockchain stockholders’ | Non-controlling | Total stockholders’ | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | deficit | equity | interest | equity | |||||||||||||||||||||||||
Balance as of January 1, 2019 | 13,000 | $ | 69 | 14,519,058 | $ | 202,917 | $ | (197,199 | ) | $ | 5,787 | $ | (1,296 | ) | $ | 4,491 |
| |||||||||||||||
Delivery of common stock underlying restricted stock units | - | - | 239,751 | - | - | - | - | - | ||||||||||||||||||||||||
Common stock issued with convertible notes | - | - | 150,000 | 255 | - | 255 | - | 255 |
| |||||||||||||||||||||||
Common stock issued in connection with conversion of notes payable | - | - | 1,813,500 | 10,226 | - | 10,226 | - | 10,226 | ||||||||||||||||||||||||
Reclassification of warrant liability to equity | - | - | - | 5,439 | - | 5,439 | - | 5,439 | ||||||||||||||||||||||||
Preferred stock converted to common stock | (8,801 | ) | (47 | ) | 8,801 | 47 | - | - | - | - |
| |||||||||||||||||||||
Stock-based compensation | - | - | - | 745 | - | 745 | - | 745 | ||||||||||||||||||||||||
Issuance of common stock, net of offering costs/At-the-market offering | - | - | 8,351,762 | 23,829 | - | 23,829 | - | 23,829 | ||||||||||||||||||||||||
Net loss attributable to non-controlling interest | - | - | - | - | - | - | (264 | ) | (264 | ) | ||||||||||||||||||||||
Deconsolidation of Tess | - | - | - | - | - | - | 1,553 | 1,553 |
| |||||||||||||||||||||||
Net loss | - | - | - | - | (20,039 | ) | (20,039 | ) | - | (20,039 | ) | |||||||||||||||||||||
Balance as of December 31, 2019 | 4,199 | 22 | 25,082,872 | 243,458 | (217,238 | ) | 26,242 | (7 | ) | 26,235 |
| |||||||||||||||||||||
Issuance of common stock to settle executive compensation | - | - | 122,377 | 175 | - | 175 | - | 175 |
| |||||||||||||||||||||||
Delivery of common stock underlying restricted stock units to settle executive compensation | - | - | 5,000 | - | - | - | - | - |
| |||||||||||||||||||||||
Delivery of common stock underlying restricted stock units, net of tax withholding settlement | - | - | 2,048,096 | (446 | ) | - | (446 | ) | - | (446 | ) | |||||||||||||||||||||
Delivery of common stock underlying restricted stock units for consulting and advisory services | - | - | 40,634 | - | - | - | - | - |
| |||||||||||||||||||||||
Issuance of common stock, net of offering costs/At-the-market offering | - | - | 49,932,051 | 257,472 | - | 257,472 | - | 257,472 |
| |||||||||||||||||||||||
Issuance of common stock related to exercise of warrants | - | - | 1,492,487 | 2,895 | - | 2,895 | - | 2,895 |
| |||||||||||||||||||||||
Cancellation of Prive Escrow shares | - | - | (200,000 | ) | - | - | - | - | - |
| ||||||||||||||||||||||
Stock-based compensation | - | - | - | 3,407 | - | 3,407 | - | 3,407 | ||||||||||||||||||||||||
Net income attributable to non-controlling interest | - | - | - | - | - | - | 7 | 7 |
| |||||||||||||||||||||||
Net loss | - | - | - | - | (12,674 | ) | (12,674 | ) | - | (12,674 | ) | |||||||||||||||||||||
Balance as of December 31, 2020 | 4,199 | $ | 22 | 78,523,517 | $ | 506,961 | $ | (229,912 | ) | $ | 277,071 | $ | - | $ | 277,071 |
| ||||||||||||||||
Delivery of common stock underlying restricted stock units, net of shares settled for tax withholding settlement | - | - | 464,021 | (5,082 | ) | - | (5,082 | ) | - | (5,082 | ) | |||||||||||||||||||||
Issuance of common stock related to exercise of warrants | - | - | 415,657 | 806 | - | 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 | - | 326,152 | ||||||||||||||||||||||||
Issuance of common stock in connection with the acquisition of ESS Metron, net of 70,156 shares withheld | 645,248 | 26,735 | 26,735 | 26,735 | ||||||||||||||||||||||||||||
Issuance of common stock/At-the-market offering, net of offering costs | - | - | 24,344,057 | 669,916 | - | 669,916 | - | 669,916 | ||||||||||||||||||||||||
Issuance of common stock warrant for settlement of advisory fees | - | - | - | 1,157 | - | 1,157 | 1,157 | |||||||||||||||||||||||||
Conversion of preferred stock to common stock | (2,000 | ) | (11 | ) | 2,000 | 11 | - | - | - | - | ||||||||||||||||||||||
Stock option exercise | 10,286 | - | - | - | - | - | ||||||||||||||||||||||||||
Stock-based compensation | - | - | - | 68,491 | - | 68,491 | - | 68,491 | ||||||||||||||||||||||||
Net loss | - | - | - | - | (7,926 | ) | (7,926 | ) | - | (7,926 | ) | |||||||||||||||||||||
Balance as of December 31, 2021 | 2,199 | $ | 11 | 116,748,472 | $ | 1,595,147 | $ | (237,838 | ) | $ | 1,357,320 | $ | - | $ | 1,357,320 |
See Accompanyingaccompanying Notes to Consolidated Financial StatementsStatements.
F-7
Riot Blockchain,Platforms, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
| | | | | | | | | |
| | | |||||||
| | Years Ended December 31, | |||||||
| | 2023 |
| 2022 |
| 2021 | |||
Operating activities |
| |
| | |
| | |
|
Net income (loss) | | $ | (49,472) | | $ | (509,553) | | $ | (15,437) |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |
| | |
|
| |
|
|
Stock-based compensation | |
| 32,170 | |
| 24,555 | |
| 68,491 |
Depreciation and amortization | |
| 252,354 | |
| 107,950 | |
| 26,324 |
Amortization of license fee revenue | |
| (97) | |
| (97) | |
| (97) |
Noncash lease expense | |
| 2,509 | |
| 12,181 | |
| 275 |
Deferred income tax expense (benefit) | |
| (5,045) | |
| (11,749) | |
| 254 |
Issuance of common stock warrant for settlement of advisory fees | |
| — | |
| — | |
| 1,157 |
Impairment of Bitcoin | |
| — | |
| 147,365 | |
| 43,973 |
Impairment of goodwill | | | — | | | 335,648 | | | — |
Impairment of miners | | | — | | | 55,544 | | | — |
Change in fair value of Bitcoin | | | (184,734) | | | — | | | — |
Change in fair value of derivative asset | |
| (6,721) | |
| (71,418) | |
| (12,112) |
Change in fair value of contingent consideration | |
| — | |
| (159) | |
| 975 |
Realized loss on sale of marketable equity securities | | | — | | | 8,996 | | | — |
Realized gain on sale/exchange of long-term investment | |
| — | |
| — | |
| (26,260) |
Realized gain on sale of Bitcoin | |
| — | |
| (30,346) | |
| (253) |
Unrealized loss on marketable equity securities | |
| — | |
| — | |
| 13,655 |
Loss (gain) on sale/exchange of equipment | |
| 5,336 | |
| (16,281) | |
| — |
Casualty-related charges | | | 1,526 | | | 9,688 | | | — |
Bitcoin Mining revenue | | | (188,996) | | | (156,870) | | | (184,422) |
Proceeds from sale of Bitcoin | | | 176,219 | | | 79,529 | |
| 295 |
Changes in assets and liabilities: | |
|
| |
|
| |
|
|
(Increase)/decrease in operating assets | | | 6,352 | | | 12,058 | | | (7,148) |
Increase/(decrease) in operating liabilities | | | (8,316) | | | 3,489 | | | 4,248 |
Net cash provided by (used in) operating activities | |
| 33,085 | |
| 530 | |
| (86,082) |
| |
|
| |
|
| |
|
|
Investing activities | |
|
| |
|
| |
|
|
Proceeds from the sale of marketable equity securities | | | — | | | 1,808 | | | — |
Acquisition of Whinstone, net of cash acquired | |
| — | |
| — | |
| (40,879) |
Acquisition of ESS Metron, net of cash acquired | |
| — | |
| — | |
| (29,567) |
Proceeds from the sale of long-term investments | |
| — | |
| — | |
| 1,800 |
Deposits on equipment | |
| (230,397) | |
| (194,923) | |
| (274,833) |
Security deposits | | | — | | | (3,809) | | | — |
Investment in convertible debt | | | (4,500) | | | — | | | — |
Purchases of property and equipment, including construction in progress | |
| (193,704) | |
| (148,412) | |
| (147,116) |
Casualty-related recoveries | | | 7,500 | | | — | | | — |
Proceeds from the sale of equipment | | | 6,369 | | | — | | | — |
Patent costs incurred | |
| (34) | |
| (9,527) | |
| (30) |
Net cash provided by (used in) investing activities | |
| (414,766) | |
| (354,863) | |
| (490,625) |
| |
|
| |
|
| |
|
|
Financing activities | |
|
| |
|
| |
|
|
Proceeds from the issuance of common stock / At-the-market offering | |
| 778,430 | |
| 304,849 | |
| 684,817 |
Offering costs for the issuance of common stock / At-the-market offering | |
| (16,657) | |
| (6,640) | |
| (14,901) |
Proceeds from exercise of common stock warrants | |
| — | |
| — | |
| 806 |
Payments on contingent consideration liability - future power credits | | | — | | | (15,725) | | | — |
Proceeds from Credit and Security Facility | | | 6,920 | | | — | | | — |
Repayments of Credit and Security Facility | | | (6,059) | | | — | | | — |
Debt issuance costs | | | (77) | | | — | | | — |
Repurchase of common shares to pay employee withholding taxes | |
| (14,035) | |
| (10,138) | |
| (5,082) |
Net cash provided by (used in) financing activities | |
| 748,522 | |
| 272,346 | |
| 665,640 |
| |
|
| |
|
| |
|
|
Net increase (decrease) in cash and cash equivalents | |
| 366,841 | |
| (81,987) | |
| 88,933 |
Cash and cash equivalents at beginning of period | |
| 230,328 | |
| 312,315 | |
| 223,382 |
Cash and cash equivalents at end of period | | $ | 597,169 | | $ | 230,328 | | $ | 312,315 |
(in thousands)
Years Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Cash flows from operating activities | ||||||||||||
Net loss | $ | (7,926 | ) | $ | (12,667 | ) | $ | (20,303 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
Stock-based compensation | 68,491 | 3,407 | 745 | |||||||||
Depreciation and amortization | 26,324 | 4,494 | 119 | |||||||||
Amortization of license fee revenue | (97 | ) | (97 | ) | (96 | ) | ||||||
Amortization of right of use assets | 275 | 367 | 2,297 | |||||||||
Income tax expense (benefit) | 254 | - | (143 | ) | ||||||||
Issuance of common stock warrant for settlement of advisory fees | 1,157 | - | - | |||||||||
Impairment of long-term investment | - | 9,413 | - | |||||||||
Impairment of cryptocurrencies | 36,462 | 989 | 844 | |||||||||
Loss on issuance of convertible notes, common stock and warrants | - | - | 6,155 | |||||||||
Change in fair value of convertible notes | - | - | 3,896 | |||||||||
Change in fair value of warrant liability | - | - | 2,869 | |||||||||
Gain on deconsolidation of Tess | - | - | (1,139 | ) | ||||||||
Impairment of intangible rights acquired | - | - | 700 | |||||||||
Reversal of registration rights penalty | - | (1,358 | ) | - | ||||||||
Change in fair value of derivative asset | (12,112 | ) | - | - | ||||||||
Change in fair value of contingent consideration | 975 | - | - | |||||||||
Gain on extinguishment of accounts payable, other liabilities and accrued interest | - | - | (854 | ) | ||||||||
Realized gain on sale/exchange of long-term investment | (26,260 | ) | - | - | ||||||||
Realized gain on sale/exchange of cryptocurrencies | (253 | ) | (5,184 | ) | (665 | ) | ||||||
Unrealized loss on marketable equity securities | 13,655 | - | - | |||||||||
Gain on sale of equipment | - | (29 | ) | - | ||||||||
Accrued interest on Verady investment | - | - | (20 | ) | ||||||||
Changes in assets and liabilities: | ||||||||||||
Accounts receivable | (4,446 | ) | - | - | ||||||||
Prepaid expenses and other current assets | (1,890 | ) | 795 | (101 | ) | |||||||
Costs and estimated earnings in excess of billings | 3,343 | - | - | |||||||||
Cryptocurrencies - mining | (184,422 | ) | (11,838 | ) | (6,606 | ) | ||||||
Security deposits | (3,180 | ) | - | - | ||||||||
Future power credits | (975 | ) | - | - | ||||||||
Accounts payable | (2,770 | ) | 1 | (1,887 | ) | |||||||
Accrued expenses | 16,070 | 928 | 1,070 | |||||||||
Billings in excess of costs and estimated earnings | (619 | ) | - | - | ||||||||
Customer deposits | 6,124 | - | - | |||||||||
Deferred revenue | (12,895 | ) | - | - | ||||||||
Lease liability | (1,662 | ) | (368 | ) | (2,296 | ) | ||||||
Net cash used in operating activities | (86,377 | ) | (11,147 | ) | (15,415 | ) | ||||||
| ||||||||||||
Cash flows from investing activities | ||||||||||||
Acquisition of Whinstone, net of cash acquired | (40,879 | ) | - | - | ||||||||
Acquisition of ESS Metron, net of cash acquired | (29,567 | ) | - | - | ||||||||
Proceeds from the sale of long-term investments | 1,800 | - | - | |||||||||
Proceeds from sale of cryptocurrencies | 295 | 8,298 | 3,196 | |||||||||
Proceeds from the sale of equipment | - | 146 | - | |||||||||
Deposits on equipment | (274,833 | ) | (33,093 | ) | (1,449 | ) | ||||||
Purchases of property and equipment, including construction in progress | (147,116 | ) | (8,139 | ) | (4,958 | ) | ||||||
Patent costs incurred | (30 | ) | (44 | ) | (38 | ) | ||||||
Net cash used in investing activities | (490,330 | ) | (32,832 | ) | (3,249 | ) | ||||||
| ||||||||||||
Cash flows from financing activities | ||||||||||||
Proceeds from issuance of convertible notes | - | - | 3,000 | |||||||||
Repayment of notes payable and other obligations | - | - | (950 | ) | ||||||||
Proceeds from the issuance of common stock / At-the-market offering | 684,817 | 264,727 | 24,825 | |||||||||
Offering costs for the issuance of common stock / At-the-market offering | (14,901 | ) | (7,255 | ) | (996 | ) | ||||||
Proceeds from exercise of common stock warrants | 806 | 2,895 | - | |||||||||
Repurchase of common shares to pay employee withholding taxes | (5,082 | ) | (446 | ) | - | |||||||
Net cash provided by financing activities | 665,640 | 259,921 | 25,879 | |||||||||
| ||||||||||||
Net increase in cash and cash equivalents | 88,933 | 215,942 | 7,215 | |||||||||
Cash and cash equivalents at beginning of year | 223,382 | 7,440 | 225 | |||||||||
Cash and cash equivalents at end of year | $ | 312,315 | $ | 223,382 | $ | 7,440 | ||||||
| ||||||||||||
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 combinations | $ | 352,887 | $ | - | $ | - | ||||||
Issuance of common stock to settle previously accrued executive compensation | $ | - | $ | 175 | $ | - | ||||||
Reclassification of deposits to property and equipment | $ | 46,711 | $ | 1,449 | $ | - | ||||||
Construction in progress included in accrued expenses | $ | 2,423 | $ | - | $ | - | ||||||
Cryptocurrencies received from sale of equipment | $ | - | $ | 52 | $ | - | ||||||
Conversion of preferred stock to common stock | $ | 11 | $ | - | $ | 47 | ||||||
Conversion of notes payable to common stock | $ | - | $ | - | $ | 10,226 | ||||||
Reclassification of warrant liability to equity | $ | - | $ | - | $ | 5,439 | ||||||
Common stock issued in connection with conversion of notes payable | $ | - | $ | - | $ | 255 | ||||||
Cryptocurrencies used to purchase miners | $ | - | $ | - | $ | 99 |
See Accompanyingaccompanying Notes to Consolidated Financial StatementsStatements.
F-7F-8
Riot Platforms, Inc.
Consolidated Statements of Cash Flows - continued
(in thousands)
Riot Blockchain, Inc. and Subsidiaries
| | | | | | | | | |
| | Years Ended December 31, | |||||||
| | 2023 |
| 2022 |
| 2021 | |||
Supplemental information: | |
|
| |
|
| |
|
|
Cash paid for interest | | $ | 84 | | $ | — | | $ | — |
Cash paid for taxes | | $ | 680 | | $ | — | | $ | — |
Non-cash transactions | |
|
| |
|
| |
|
|
Issuance of common stock for business combination | | $ | — | | $ | — | | $ | 352,887 |
Reclassification of deposits to property and equipment | | $ | 78,376 | | $ | 422,865 | | $ | 46,711 |
Construction in progress included in accrued expenses | | $ | 23,451 | | $ | 16,621 | | $ | 2,423 |
Bitcoin exchanged for employee compensation | | $ | 869 | | $ | 1,495 | | $ | 295 |
Conversion of preferred stock to common stock | | $ | — | | $ | 11 | | $ | 11 |
Cumulative effect upon adoption of ASU 2023-08 | | $ | 5,994 | | $ | — | | $ | — |
Right of use assets exchanged for new operating lease liabilities | | $ | 1,249 | | $ | 10,333 | | $ | 13,622 |
Property and equipment obtained in exchange transaction | | $ | — | | $ | 10,409 | | $ | — |
See accompanying Notes to Consolidated Financial Statements.
F-9
(in thousands, except for share and per share amounts)
Note 1. Organization and Basis of Presentation
Nature of Operations:Organization
We areRiot Platforms, Inc. is a vertically integrated Bitcoin mining and infrastructure development company principally engaged in enhancing our capabilities to mine Bitcoin. WeBitcoin in support of the Bitcoin blockchain. The Company also provide theprovides comprehensive and critical mining infrastructure for our institutional scaleinstitutional-scale hosted clients to mine Bitcoin at ourits Rockdale Facility. The Rockdale Facility currently provides 700 MW in total developed capacity for Bitcoin mining facility (the “Whinstone Facility”). Our Whinstoneand data center hosting services for institutional-scale hosted clients. The Company is also developing the Corsicana Facility, is believed to be the largesta second large-scale Bitcoin mining data center facility, as measured by developedwhich, upon completion, is expected to have approximately one gigawatt of capacity in North America.available for Bitcoin mining and data center hosting services for institutional-scale hosted clients.
We operate in an environment which is consistently evolving based on the proliferation of Bitcoin and cryptocurrencies in general. A significant component of our strategy is to effectively and efficiently allocate capital between opportunities that generate the highest return on our capital.
As described in “Note 18, Note 20. Segment Information”Information, we operate in three business segments: (1)Bitcoin Mining, (2)Data Center Hosting, and (3) Engineering.
Note 2. Liquidity and Financial Condition
The Company has experienced historical losses and negative cash flows from operations. At December 31, 2021, the Company had approximate balances of cash and cash equivalents of $312.3 million, working capital of $463.7 million, total stockholders’ equity of $1.4 billion and an accumulated deficit of $237.8 million. To date, the Company has, in large part, relied on equity financings to fund its operations. The Company believes its current cash on hand is sufficient to meet its operating and capital requirements for at least the next year from the date these financial statements are issued.
During the year ended December 31, 2021, the Company paid approximately $274.8 million as deposits primarily for miners and as of December 31, 2021, reclassified $46.7 million to property and equipment in connection with the receipt of 23,864 miners received at the Coinmint Facility or the Whinstone Facility. As of December 31, 2021, approximately $301.3 million remains payable to Bitmain in installments in advance of shipment of additional miners, which is scheduled to occur on a monthly basis through December 2022.
2021 ATM Offering
As disclosed in Note 12, “Stockholders’ Equity”, the Company entered into a Sales Agreement with Cantor Fitzgerald & Co., B. Riley FBR, Inc., BTIG, LLC, Compass Point Research & Trading, LLC and Roth Capital Partners, LLC (the “Sales Agents”) dated August 31, 2021 (the “Sales Agreement”), pursuant to which the Company may, from time to time, sell up to $600 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 “2021 ATM Offering”). The Company paid the Sales Agents a commission of up to 3.0% of the aggregate gross proceeds the Company received from all sales of the Company’s common stock under the Sales Agreement. The Company received net proceeds on sales of 19,910,589 shares of common stock under the Sales Agreement of approximately $587.2 million (after deducting $12.8 million in commissions and expenses) at a weighted average price of $29.53 from August 31, 2021 to December 31, 2021. With the sale and issuance of these shares, all $600 million in shares of the Company’s common stock registered under the December 2021 Registration Statement had been issued and the Company completed the 2021 ATM Offering.
COVID-19:
The COVID-19 global pandemic has been unprecedented and unpredictable and its impact is likely to continue to result in significant national and global economic disruption, which may adversely affect our business. Although the Company has experienced some changes to its miner shipments due to disruptions in the global supply chain, the Company however does not expect any material impact on its long-term strategic plans, its operations, or its liquidity due to the impacts of COVID-19. However, the Company is actively monitoring this situation and the possible effects on its financial condition, liquidity, operations, suppliers, and the industry.
F-8
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
Note 3. Basis of Presentation, Summary of Significant Accounting Policies and Recent Accounting Pronouncements
Basis of presentation and principles of consolidation
The accompanying consolidated financial statementsConsolidated Financial Statements of the Company include the accounts of the Company and its wholly or majority owned and controlled subsidiaries. Consolidated subsidiariessubsidiaries’ results are included from the date the subsidiary was formed or acquired. Intercompany investments, balances and transactions have been eliminated in consolidation. Non–controlling interests represents the minority equity investment in the Company’s subsidiaries, plus the minority investors’ share of the net operating results and other components of equity relating to the non–controlling interest.
The accompanying audited consolidated financial statementsConsolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. They include the results of operations and financial condition of Whinstone beginning on May 26, 2021 and ESS Metron on December 1, 2021. See Note 4, “Acquisitions”, for additional information on our acquisitions of Whinstone and ESS Metron. All intercompany balances and transactions have been eliminated in consolidation.
Amounts disclosed are in thousands of U.S. Dollars except for share, per share, and miner amounts.
Revision of previously issued consolidated financial statements
amounts, and Bitcoin quantities, prices and hash rate, or as otherwise noted.
As noted in Note 4. “Acquisitions”, on May 26, 2021, the Company acquired 100% of the equity interests of Whinstone. The Whinstone Acquisition was accounted for using the acquisition method of accounting in accordance with ASC 805, Business Combinations, which requires recognition of assets acquired and liabilities assumed at their respective fair values on the date of acquisition. During the third quarter of 2022, the Company discovered a classification error in its reported allocation of acquisition date fair value to property and equipment, which resulted in an understatement of property and equipment and an equal overstatement of goodwill as of the balance sheet dates outlined below.
In accordance with StaffNote 2. Significant Accounting Bulletin (“SAB”) 99, Materiality,Policies and SAB 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, the Company evaluated the materiality of the error from qualitative and quantitative perspectives, and concluded that the error was immaterial to any prior annual or interim financial statements. Notwithstanding this conclusion, management revised the accompanying Consolidated Balance Sheet as of December 31, 2021 and related notes included herein to correct this error.
The following table presents the effect of correcting this error on the Company’s Consolidated Balance Sheet as of December 31, 2021. There were no changes to other consolidated financial statements as a result of correcting this error.
As of December 31, 2021 | ||||||||||||
Consolidated Balance Sheet | As previously reported | Adjustment | As revised | |||||||||
Property & equipment, net | $ | 262,980 | $ | 13,500 | $ | 276,480 | ||||||
Goodwill | 349,063 | (13,500 | ) | 335,563 | ||||||||
Total assets | 1,530,939 | — | 1,530,939 |
The remainder of the notes to the consolidated financial statements have been updated, as applicable, to reflect the impacts of the revision described above.Recent Accounting Pronouncements
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”)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 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 goodwillfixed assets and finite-lived intangibles, stock-based compensation, and the valuation allowance associated with the Company’s deferred tax assets.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation. The reclassifications did not have a material impact on the Company’s consolidated financial statementsConsolidated Financial Statements and related disclosures. The impact on any prior period disclosures was immaterial.
Cash and cash equivalents
The Company considers allCash and cash equivalents consists of cash on hand and highly liquid investments. We consider any highly liquid investments with an original maturity of three months or less at the date of acquisition to be cash equivalents. From time to time, the Company’s cash account balances exceed the balances as covered by the Federal Deposit Insurance System.FDIC. The Company has never suffered a loss due to such excess balances. As of December 31, 2021 and 2020, the Company had no cash equivalents.
F-9
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
Accounts Receivable, netreceivable
The Company’s accounts receivable balance consists of amounts due from its mining pool operator and data center hosting and engineering customers. The Company records accounts receivable at the invoiced amount less an allowance for any potentially uncollectable accounts under the current expected credit loss (“CECL”) impairment model under ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Assets, and presents the net amount of the financial instrument expected to be collected. The CECL impairment model requires an estimate of expected credit losses, measured
F-10
over the contractual life of an instrument, that considers forecasts of future economic conditions in addition to information about past events and current conditions. Based on this model, the Company considers many factors, including the age of the balance, collection history, and current economic trends. Bad debts are written off after all collection efforts have ceased.
AllowanceAllowances for credit losses are recorded as a direct reduction from an asset’s amortized cost basis. Credit losses and recoveries are recorded in selling,Selling, general and administrative expenses in the consolidated statementsConsolidated Statements of operations.Operations. Recoveries of financial assets previously written off are recorded when received. For the years ended December 31, 2021, 20202023, 2022, and 2019,2021, the Company did not record any credit losses or recoveries.
Based on the Company’s current and historical collection experience, management recorded an allowanceallowances for doubtful accounts of less than $0.1$1.5 million and $1.9 million as of December 31, 2021. There were no accounts receivable2023 and December 31, 2022, respectively.
Bitcoin
As a result of the adoption of ASU 2023-08, Bitcoin is recorded at fair value, and changes in fair value are recognized in Change in fair value of Bitcoin, in Operating income (loss) on the Consolidated Statements of Operations, as of, December 31, 2020.
No individual customer accounted for more than 7.5% of revenueand for the year ended December 31, 2021. As2023.
Prior to the adoption of December 31, 2021, seven customersASU 2023-08, Bitcoin was accounted for as intangible assets with an indefinite useful life. Bitcoin was sold on a FIFO basis and measured for impairment whenever indicators of impairment are identified based on the intraday low quoted price of Bitcoin. To the extent an impairment loss was recognized, the loss established the new cost basis of the Bitcoin. Subsequent reversal of impairment losses was not permitted.
Bitcoin awarded to the Company through its mining activities are accounted for in connection with the Company’s revenue recognition policy.
Bitcoin is classified on the Company’s Consolidated Balance Sheet as a current asset due to the Company’s ability to sell it in a highly liquid marketplace and its intent to liquidate its Bitcoin to support operations when needed.
Purchases and sales of Bitcoin by the Company and Bitcoin awarded to the Company are included within Operating activities on the Consolidated Statements of Cash Flows as substantially all of the Company’s Bitcoin production is sold within days of being produced, but never more than 83% of accounts receivable.
Long-term investmentsthe production on a monthly basis per the Company’s internal policy
Effective January 1, 2018,. During 2024, the Company adopted Accounting Standards Update (“ASU”) 2016-01made a strategic decision to temporarily cease the sales of all its Bitcoin production and related ASU 2018-03 concerning recognitioninstead, increase its Bitcoin holdings. The Company will continue to monitor its cash needs and measurement of financial assets and financial liabilities. In adopting this new guidance,expects to sell Bitcoin in the Company has made an accounting policy electionfuture to adopt an adjusted cost method measurement alternative forfund its cash expenditures.
Long-term investments in equity securities without readily determinable fair values.
For equity investments, that are accounted for using the measurement alternative, the Company initially records equity investments at cost but is required to adjustthen adjusts the carrying value of such equity investments through earnings when there is an observable transaction involving the same or a similar investment with the same issuer or upon an impairment.
Revenue recognition
Bitcoin Mining
The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers. The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
•
Step 1: Identify the contract with the customer
•
Step 2: Identify the performance obligations in the contract
•
Step 3: Determine the transaction price
•
Step 4: Allocate the transaction price to the performance obligations in the contract
•
Step 5: Recognize revenue when the Company satisfies a performance obligation
In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met: The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).
If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.
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Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:
•
Variable consideration
•
Constraining estimates of variable consideration
•
The existence of a significant financing component in the contract
•
Noncash consideration
•
Consideration payable to a customer
Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.
The Company has entered into digital asset mining pools by executing contracts as amended from time to time, currently with one mining pool operator, with the mining pool operators to provide computing power to the mining pool. The contracts are terminable at any time by either party and the Company’s enforceable right to compensation begins only begins when, and lasts as long as, the Company provides computing power to the mining pool operator. In exchange for providing computingoperator and is created as power is provided over time. The only consideration due to the Company is entitledrelates to a fractional sharethe provision of computing power. The contracts are terminable at any time by the fixed cryptocurrency awardCompany, at no cost to the miningCompany, or by the pool operator, receives (less digital asset transaction fees tounder certain conditions specified in the mining pool operator which are immaterial and are recorded as a deduction from revenue), for successfully adding a block to the blockchain. The terms of the agreement provide that neither party can dispute settlement terms after thirty-five days following settlement. The Company’s fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm.
contract. Providing computing power in digital asset transaction verification services is an output of the Company’s ordinary activities. The provision of providingProviding such computing power is the only performance obligation in the Company’s contracts with mining pool operators.
The transaction consideration the Company receives, if any, is noncash consideration whichin the Company measures at fair value on the date received, which is not materially different thanform of Bitcoin. Changes in the fair value at contract inception orof the time the Company has earned the award from the pools. Thenoncash consideration is all variable. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the mining pool operator successfully places a block (by being the firstdue to solve an algorithm) and the Company receives confirmationform of the consideration it will receive, at(changes in the market price of Bitcoin) are not included in the transaction price and therefore, are not included in revenue. Certain mining pool operators charge fees to cover the costs of maintaining the pool, which time revenueare deducted from amounts we may otherwise earn and are treated as a reduction to the consideration
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received. Fees fluctuate and historically have been no more than approximately 2% per reward earned, on average. The terms of the agreements provide that neither party can dispute settlement terms after approximately thirty-five days following settlement.
In exchange for providing computing power, the Company is recognized. entitled to either:
● | a Full-Pay-Per-Share payout of Bitcoin based on a contractual formula, which primarily calculates the hash rate provided by the Company to the mining pool as a percentage of total network hash rate, and other inputs. The Company is entitled to consideration even if a block is not successfully placed by the mining pool operator. The contract is in effect until terminated by either party. |
● | The consideration is all variable. Because it is probable that a significant reversal of cumulative revenue will not occur and the Company is able to calculate the payout based on the contractual formula, noncash consideration is estimated and recognized based on the spot price of Bitcoin determined using the Company’s principal market for Bitcoin at the inception of each contract. Noncash consideration is measured at fair value at contract inception. Fair value of the crypto asset consideration is determined using the quoted price on the Company’s principal market for Bitcoin at the beginning of the contract period at the single bitcoin level (one bitcoin). This amount is recognized in revenue as hash rate is provided. |
● | The Company transitioned completely to this mining pool type in December 2022 and utilized it for the year ended December 31, 2023. |
Or:
● | a fractional share of the fixed Bitcoin award the mining pool operator receives (less digital asset transaction fees to the mining pool operator which are immaterial and are recorded as a deduction from revenue) for successfully adding a block to the blockchain based on a proportion of the Company’s “scoring hash rate” to the pool’s “scoring hash rate” where the scoring hash rate as defined by the pool is the exponential moving average of the hash power contributed by the Company or by all pool members combined. The Company’s fractional share of the Bitcoin reward is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm. |
● | Because the consideration to which the Company expects to be entitled for providing computing power is entirely variable, as well as being noncash consideration, the Company assesses the estimated amount of the variable noncash consideration to which it expects to be entitled for providing computing power at contract inception and subsequently, to determine when and to what extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur once the uncertainty associated with the variable consideration is subsequently resolved (the “constraint”). Only when significant revenue reversal is concluded probable of not occurring can estimated variable consideration be included in revenue. Based on evaluation of likelihood and magnitude of a reversal in applying the constraint, the estimated variable noncash consideration is constrained from inclusion in revenue until the end of the contract term, when the underlying uncertainties have been resolved and number of Bitcoin to which the Company is entitled becomes known. |
● | Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the mining pool operator successfully places a block (by being the first to solve an algorithm) and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized based on the spot rate of Bitcoin determined using the Company’s principal market for Bitcoin at the time of receipt. |
● | The Company utilized this mining pool type during the year ended December 31, 2021 and throughout 2022, until mid-December 2022. |
There is no significant financing component in these transactions.
Fair valuetransactions due to the performance obligations and settlement of the cryptocurrency award received is determined using the quoted pricetransactions being on a daily basis.
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Table of the related cryptocurrency at the time of receipt.Contents
Riot Platforms, Inc.
Notes to Consolidated Financial Statements
Data Center Hosting
In general, we provide power for our data center customers on a variable (sub-metered) basis. A customer pays us variable monthly fees for the specific amount of power utilized at rates specified in each contract, subject to certain minimums. We recognize variable power revenue each month as the uncertainty related to the consideration is resolved, power is provided to our customers, and our customers utilize the power (the customer simultaneously receives and consumes the benefits of the Company’s performance).
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Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
We have determined that our contracts contain a series of performance obligations which qualify to be recognized under a practical expedient available known as the “right to invoice.” This determination allows variable consideration in such contracts to be allocated to and recognized in the period to which the consideration relates, which is typically the period in which it is billed, rather than requiring estimation of variable consideration at the inception of the contract. We have also determined that the contracts contain a significant financing component because the timing of revenue recognition differs from the timing of invoicing by a period, exceeding one year.
The Company also installs certain hosted customers’ mining equipment and bills the customer at a fixed fee per piece of equipment or at an hourly rate. Revenue is recognized upon completion of the installation.
We generate engineering and construction services revenue from the fabrication and deployment of immersion cooling technology for Bitcoin mining customers. Wecustomers, for which we bill the customer at a fixed monthly fee or at an hourly rate. For the construction of customer-owned equipment, revenue is recognized upon completion of each phase of the construction project, as defined in each contract. For the construction of assets owned by Whinstoneus but paid for and used by the customer during the term of their data center hosting contract, revenue is recognized on a straight-line basis over the remaining life of the contract. Due to the long-term nature of the hosting contracts, there is a significant financing component in transactions where the customer paid for the construction of assets owned by the Company.
Maintenance services include cleaning, cabling, and other services to maintain the customers’customer equipment. We bill the customer at a fixed monthly fee or at an hourly rate. Revenue is recognized as these services are provided.
Deferred revenue is primarily from advance payments received and is recognized on a straight-line basis over the remaining life of the contract or upon completion of the installation of the customers’ equipment.
Our primary data center hosting contracts contain Service Level Agreement clauses, which guarantee a certain percentage of time thethat power will be available to our customer.customers. In the rare case that we may incur penalties under these clauses, we account for payments made to customers in accordance with ASC 606-10-32-25, Consideration Payable to a Customer, which requiresrecognize the payment be recognized as variable consideration and a reduction of the transaction price and, therefore, of revenue, when not in exchange for a good or service from the customer.
Engineering
Substantially all revenue is derived from the sale of custom products built to customers’ specifications under fixed-price contracts with one identified performance obligation. Revenues areRevenue is 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.
To determine the amount of revenue to recognize over time, the Company utilizes the cost-to-cost method as management believes cost incurred best represents the amount of work completed and remaining on projects. As the cost-to-cost method is driven by incurred cost, the Company calculates the percentage of completion by dividing costs incurred to date by the total estimated cost. The percentage of completion is then multiplied by estimated revenuesrevenue to determine inception-to-date revenue. Approved changes to design plans are generally recognized as a cumulative adjustment to the percentage of completion calculation. Revenue recognized for the period is the current inception-to-date recognized revenue less the prior period inception-to-date recognized revenue. If a contract is projected to result in a loss, the entire contract loss is recognized in the period when the loss was first determined, and any additional losses incurred subsequently are recognized in the subsequent reporting periods as they are identified. Additionally, contract costs incurred to date and expected total contract costs are continuously monitored during the term of the contract.
F-12
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
Changes in the job performance, job conditions and final contract settlements are factors that influence management’s assessment of total contract value and the total estimated costs to complete those contracts, and therefore, profit and revenue recognition. Any costs to obtain a contract are not material to the Company’s financial statements and would be expensed as incurred. Because of the inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term. The length of time for the Company to complete a custom product varies but is typically between four to 12 weeks.
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Customers are typically required to make periodic progress payments to the Company based on contractually agreed-upon milestones. Invoices are due net, 30 days, and retainage, if any, is generally due 30 days after delivery. Taxes collected from customers and remitted to governmental authorities are excluded from revenue. Shipping and handling costs are treated as fulfillment costs and are included in cost of sales.
Other RevenueFair value measurement
Other revenue is revenue recognized from an upfront license fee generated from our legacy animal health business. The upfront fee was recorded as deferred revenue and is being amortized into revenue over the term of the License Agreement.
Derivative Accounting
Power Supply Contract and Demand Response Services
In May 2020, Whinstone entered into a Power Supply Agreement with TXU Energy Retail Company LLC (“TXU”) to provide the delivery of a fixed amount of electricity by TXU to Whinstone (via the facility owned by Oncor Electric Delivery Company, LLC (“Oncor”)) for a fixed price through April 30, 2030. The Power Supply Agreement provides a consistent and sufficient supply of electricity at the Whinstone Facility. If Whinstone uses more electricity than contracted, the cost of the excess is incurred at the current spot rate. Concurrently, Whinstone entered into a contract with Oncor for the extension of delivery system transmission/substation facilities to facilitate delivery of the electricity to the Whinstone Facility (the “Facilities Agreement”). Power costs incurred under this contract are determined on an hourly basis using settlement information provided by the Electric Reliability Council of Texas (“ERCOT”) and are recorded in cost of revenues - data center hosting in the consolidated statements of operations.
The demand response services program (“Demand Response Service”) provides the ERCOT market with valuable reliability and economic services by helping to preserve system reliability, enhancing competition, mitigating price spikes, and encouraging the demand side of the market to respond better to wholesale price signals. In collaboration with market participants such as the Company, ERCOT has developed demand response products and services for customers that have the ability to reduce or modify electricity use in response to instructions or signals. Market participants with electrical loads like Whinstone may participate in the Demand Response Service program directly by offering their electrical loads into the ERCOT markets, or indirectly by voluntarily reducing their energy usage in response to increasing wholesale prices.
Depending on the spot market price of electricity, under this program, we opportunistically sell electricity back to ERCOT in exchange for cash payments, rather than providing the power to our customers during these peak times in order to most efficiently manage our operating costs. We sold approximately $6.5 million in electricity back to ERCOT during the period from May 26, 2021 (the “Acquisition Date”) through December 31, 2021. These sales back to ERCOT are recorded as part of the change in fair value of derivative asset in the consolidated statements of operations.
While we manage operating costs at the Whinstone Facility in part by periodically selling unused or uneconomical power in the market back to ERCOT, we do not consider such actions trading activities. That is, we do not engage in speculation in the power market as part of our ordinary activities. Because the Demand Response Services programs allow for net settlement, we have determined the Power Supply Agreement meets the definition of a derivative under ASC 815, Derivatives and Hedging, (“ASC 815”). However, because we have the ability to sell the power back to the grid rather than take physical delivery, physical delivery is not probable through the entirety of the contract and therefore, we do not believe the normal purchases and normal sales scope exception applies to the Power Supply Agreement. Accordingly, the Power Supply Agreement (the non-hedging derivative contract) is recorded at estimated fair value each reporting period with the change in the fair value recorded in change in fair value of derivative asset in the consolidated statements of operations.
F-13
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
In February 2021, the State of Texas experienced an extreme and unprecedented winter weather event that resulted in prolonged freezing temperatures and caused an electricity generation shortage that was severely disruptive to the whole state. While demand for electricity reached extraordinary levels due to the extreme cold, the supply of electricity significantly decreased in part because of the inability of certain power generation facilities to supply electric power to the grid. Due to the extreme market price of electricity during this time, at the request of ERCOT, Whinstone stopped supplying power to its customers and instead sold power back to the grid.
In April 2021, under the provisions of the TXU Power Supply Agreement, and as a result of the weather event, Whinstone entered into a Qualified Scheduling Entity (“QSE”) Letter Agreement, which resulted in Whinstone being entitled to receive approximately $125.1 million for its power sales during the February winter storm, all under the terms and conditions of the QSE Letter Agreement. Whinstone received cash of $29.0 million in April 2021 (after deducting $10.0 million in power management fees owed by Whinstone), approximately $59.7 million is scheduled to be credited against future power bills of Whinstone beginning in 2022 and the remaining $26.3 million is contingent upon ERCOT’s future remittance. These amounts are gross before fair value adjustments and expenses incurred by Whinstone for power management fees noted above and customer settlements. The fair value of the settlement agreement was estimated and recognized as an asset as part of acquisition accounting. Additionally, pursuant to the Northern Data stock purchase agreement, the Company agreed to pay Seller additional consideration in cash in the amount of the future power credits, net of income taxes, when and if realized by Whinstone. See Note 4, “Acquisitions”.
Fair Value Measurement
The Company follows the accounting guidance in ASC 820, Fair Value Measurement, (“ASC 820”) for its fair value measurements of financial assets and liabilities measured at fair value on a recurring basis. Under this accounting guidance, fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should beis determined based on assumptions that market participants would use in pricing an asset or a liability.
The accounting guidance requires fairFair value measurements beare classified and disclosed in one of the following three categories:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Observable inputs other than Level 1 prices, for similar assets or liabilities that are directly or indirectly observable in the marketplace.
Level 3: Unobservable inputs which are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The Company’s derivative asset related to its Power Supply Agreement is classified within Level 3 of the fair value hierarchy because the fair value is estimated by utilizing valuation models and significant unobservable inputs. The Company’s only financial liability based on Level 3 inputs is a contingent consideration arrangement related to its acquisition of Whinstone. The Company is contractually obligated to pay contingent consideration payments to the Seller if Whinstone realizes certain power credits. (See Note 14, “Fair Value Measurement”)
The Company will update its assumptions each reporting period based on new developments and record such amounts at fair value based on the revised assumptions until the agreements expire or contingency is resolved, as applicable.
As of December 31, 2020, there were no financial assets or liabilities measured at fair value.
F-14
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
Property and Equipmentequipment
Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Estimated useful lives for leasehold improvements are typically the lesser of the estimated useful life of the asset or the life of the term of the lease. The estimated useful lives for all otherthe Company’s property and equipment are as follows:
| | | ||
| Life (Years) | |||
Buildings and building improvements | 10-25 | |||
Miners and mining equipment | 2 | |||
Machinery and facility equipment |
| 5-10 | ||
Office and computer equipment | 3 |
Goodwill and Other Intangible Assets
The Company accountsImpairment of long-lived assets
Management reviews long-lived assets for intangibleimpairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets under ASC 350-30, Intangibles – Goodwillto be held and Other. used is measured by a comparison of the carrying amount of an asset to undiscounted future cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Goodwill
Goodwill represents the cost of a business acquisition in excess of the fair value of the net assets acquired. The Company determined that it has three reporting units for goodwill impairment testing purposes, Mining, Hosting, and Engineering, which is consistent with internal management reporting and management’s oversight of operations. Goodwill is not amortized and is reviewed for impairment annually as of December 31, or more frequently if facts and circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. We use both qualitative and quantitative analyses in making this determination. The Company determined that it has three reporting units for goodwill impairment testing purposes, Bitcoin Mining, Data Center Hosting, and Engineering, which is consistent with internal management reporting and management’s oversight of operations. Our analyses require significant assumptions and judgments, including
F-14
assumptions about future economic conditions, revenue growth, and operating margins, among other factors. Example events or changes in circumstances considered in the qualitative analysis, many of which are subjective in nature, include: a significant negative trend in our industry or overall economic trends, a significant change in how we use the acquired assets, a significant change in or our business strategy, a significant decrease in the market value of the asset, a significant change in regulations or in the industry that could affect the value of the asset, and a change in segments. If it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company performs the quantitative test to identify and measure the amount of goodwill impairment loss. The Company compares the fair value of the reporting unit with its carrying amount. If the carrying amount exceeds the fair value, goodwill of the reporting unit is considered impaired and that excess is recognized as a goodwill impairment loss.
Finite-lived intangible assets
Intangible assets with finite lives are comprised of customer contracts, trademarks, UL Listings, and patents that are amortized on a straight-line basis over their expected useful lives, which is their contractual term or estimated useful life. Patents costs consisting of filing and legal fees incurred are initially recorded at cost. Certain patents are in the legal application process and therefore are not currently being amortized. The Company performs assessments to determine whether finite-lived classification is still appropriate at least annually. The carrying value of finite-lived assets and their remaining useful lives are also reviewed at least annually to determine if circumstances exist which may indicate a potential impairment or revision to the amortization period. A finite-lived intangible asset is considered to be impaired if its carrying value exceeds the estimated future undiscounted cash flows to be derived from it. We exercise judgment in selecting the assumptions used in the estimated future undiscounted cash flows analysis. Impairment is measured by the amount that the carrying value exceeds fair value.
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Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
The use of different estimates or assumptions could result in significantly different fair values for our reporting units and intangible assets.
As of December 31, 2021, the carrying amounts and estimated lives of the Company’s intangible assets with finite lives were as follows:
($ in thousands) | 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 | |||||||||||
Finite-lived intangible assets | $ | 14,742 | $ | (580 | ) | $ | 14,162 |
As of December 31, 2020, the carrying amounts of the Company’s intangible assets with finite lives were as follows:
Gross book value | Accumulated amortization | Net book value | ||||||||||
Patents | $ | 713 | $ | (377 | ) | $ | 336 |
The following table represents the total estimated amortization of intangible assets for the five succeeding years:
For the years ending December 31, | Estimated amortization expense | |||
2022 | $ | 1,446 | ||
2023 | 1,446 | |||
2024 | 1,446 | |||
2025 | 1,446 | |||
2026 | 1,446 | |||
Thereafter | 6,932 | |||
Total | $ | 14,162 |
We did not identify any impairment of our Goodwill and Other Intangible Assets during the years ended December 31, 2021, 2020 and 2019 other than our cryptocurrencies discussed below.
Cryptocurrencies
Cryptocurrencies, (including Bitcoin and Bitcoin cash) are included in current assets in the accompanying consolidated balance sheets. Cryptocurrencies purchased are recorded at cost and cryptocurrencies awarded to the Company through its mining activities are accounted for in connection with the Company’s revenue recognition policy disclosed above.
Cryptocurrencies held are accounted for as intangible assets with indefinite useful lives. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the cryptocurrency at the time its fair value is being measured. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted. During 2021, 2020 and 2019, the Company recorded impairment charges on its cryptocurrency holdings of $36.5 million, $1.0 million and $0.8 million, respectively.
Purchases of cryptocurrencies by the Company are included within investing activities in the accompanying consolidated statements of cash flows, while cryptocurrencies awarded to the Company through its mining activities are included within operating activities in the accompanying consolidated statements of cash flows. The sales of cryptocurrencies are included within investing activities in the accompanying consolidated statements of cash flows and any realized gains or losses from such sales are included in other income (expense) in the consolidated statements of operations. The Company accounts for its gains or losses in accordance with the first in first out (FIFO) method of accounting.
Impairment of long-lived assets
Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
During the year ended December 31, 2020, the Company determined there were indicators that would cause a 100% impairment of its Coinsquare investment and observed price changes. Therefore, the Company recorded an impairment expense of $9.4 million for its investment in Coinsquare during the year ended December 31, 2020.
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Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
Business Combinationscombinations
The Company applies the provisions of ASC Topic 805, Business Combinations, (“ASC 805”) in the accounting for acquisitions of businesses. ASC 805 requires us to useuses the acquisition method of accounting by recognizing the identifiable tangible and intangible assets acquired and liabilities assumed, and any non-controlling interest in the acquired business, measured at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the aforementioned amounts. Contingent consideration is included within the purchase price and is recognized at its fair value on the acquisition date. A liability resulting from contingent consideration is remeasured to fair value as of each reporting date until the contingency is resolved, and subsequent changes in fair value are recognized in earnings. Contingent consideration is recorded in current and long-term liabilities inon our consolidated balance sheets.Consolidated Balance Sheets.
While we use our best estimates and assumptions to accurately apply preliminary values to assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, these estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of the assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in the consolidated statementsConsolidated Statements of operations.Operations.
Accounting for business combinations requires management to make significant estimates and assumptions, especially at the acquisition date, including estimates for intangible assets, contractual obligations assumed, pre-acquisition contingencies, and contingent consideration, where applicable. Although we believe the assumptions and estimates we have made have been reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain of the intangible assets we have acquired include; future expected cash flows from customer contracts, discount rates, and estimated market changes in the value of the Power Supply Agreement,PPA, which is accounted for as a nonhedged derivative contract. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates, or actual results.
Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.
Investment in marketable equity securities
Our investmentThe Company measures its investments in marketable equity securities consists entirely of common shares of Mogo, Inc. (NASDAQ: MOGO), resulting from the April and May 2021 transactions. (See Note 7, “Investments in Marketable Equity Securities”). The Company accounted for this investment in accordance with ASC 321, Investments-Equity Securities, (“ASC 321”) due to the shares having a readily determinable fair value since they are traded on NASDAQ and have significant average daily volume traded. As a result, the investment is required to be measured at fair value at each balance sheet date, with unrealized holding gains and losses recorded in other income (expense)., as the shares have a readily determinable fair value since they are publicly traded and have significant average daily volume traded.
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Leases
The Company accounts for its leases under ASC 842, Leases (“ASC 842”). Accordingly, the Company determines whether an arrangement contains a lease at the inception of the arrangement. If a lease is determined to exist, the term of such lease is assessed based on the date on which the underlying asset is made available for the Company’s use by the lessor. The Company’s assessment of the lease term reflects the non-cancelable term of the lease, inclusive of any rent-free periods and/or periods covered by early-termination options which the Company is reasonably certain of not exercising, as well as periods covered by renewal options which the Company is reasonably certain of exercising. The Company also determines lease classification as either operating or finance at lease commencement, which governs the pattern of expense recognition and the presentation reflected inon the consolidated statementsConsolidated Statements of operationsOperations over the lease term. For all periods presented, the Company only had operating leases.
For leases with a term exceeding 12 months, aan operating lease liability is recorded on the Company’s consolidated balance sheet at lease commencement reflecting the present value of its fixed minimum payment obligations over the lease term. A corresponding operating lease right-of-use (“ROU”) asset equal to the initial lease liability is also recorded, adjusted for any prepaid rent and/or initial direct costs incurred in connection with execution of the lease and reduced by any lease incentives received. For purposes of measuring the present value of its fixed payment obligations for a given lease, the Company uses its incremental borrowing rate, determined based on information available at lease commencement, as rates implicit in its leasing arrangements are typically not readily determinable. The Company’s incremental borrowing rate reflects the rate it would pay to borrow on a secured basis and incorporates the term and economic environment of the associated lease.
For the Company’s operating leases, fixed lease payments are recognized as lease expense on a straight-line basis over the lease term. For leases with a term of 12 months or less, any fixed lease payments are recognized on a straight-line basis over the lease term and are not recognized on the Company’s consolidated balance sheetConsolidated Balance Sheets as an accounting policy election. Leases qualifying for the short-term lease exception were insignificant. Variable lease costs are recognized as incurred.incurred and primarily consist of common area maintenance and utility charges not included in the measurement of right of use assets and operating lease liabilities.
F-17
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
Segment and Reporting Unit InformationOperating segments
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”)CODM in deciding how to allocate resources to an individual segment and in assessing performance. A committee consistingThe Company’s CODM is comprised of several members of its executive management team who use revenue and cost of revenue of its three reporting segments to assess the performance of the Company’s executives is determined to be the CODM. The Company has threebusiness of our reportable operating segments as of December 31, 2021. See Note 18, “Segment Information”.segments.
Income Taxestaxes
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.
F-18
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
Deferred Revenue
The Company recognized deferred revenue related to its acquisition of Whinstone, which consists primarily of advance payments received, and is recognized on a straight-line basis over the remaining life of the contract or upon completion of the installation of the customers’ equipment.
The Company recognized upfront license fees from Ceva Santé Animale S.A. (“Licensee”) related to its exclusive license agreement (“License Agreement”), which have been recorded as deferred revenue and are being amortized over the term of the License Agreement. Amortization of the license fees totaling approximately $1.6 million began in July 2012.Contract balances
Contract assets consist of costs and estimated earnings in excess of billings on uncompleted contractsengineering contracts.
Deferred revenue relates to upfront payments and unearned revenue consistsconsideration received from customers for data center hosting and the upfront license fee generated from our legacy animal health business. Contract liabilities consist of billings in excess of costs and estimated earnings on uncompleted contracts.engineering contracts,
Cost
Remaining performance obligations
Remaining performance obligations represent the transaction price of Revenues
•
Mining: Cost of revenues consists primarily of direct production costs of mining operations, including electricity, labor, insurance and, in 2020, rentcontracts for work that has not yet been performed. The Company elected the practical expedient to not adjust the transaction price for the Oklahoma City facilityexistence of a significant financing component if the timing difference between a customer’s payment and in 2021, the variable Coinmint hosting fee, but excluding depreciation and amortization which are separately stated. our performance is one year or less.
F-16
•Riot Platforms, Inc.
Hosting: Cost of revenues consists primarily of direct power costs, rent andNotes to Consolidated Financial Statements
Stock-based compensation costs.
•
Engineering: Cost of revenues consists primarily of direct materials and labor, as well as indirect manufacturing costs.
Stock-based Compensation
The Company accounts for share-based payment awards exchanged for services at the estimated grant date fair value of the award. Stock options issued underaward, which is based on the Company’s long-term incentive plans are granted with an exercise price equal to no less than thefair market pricevalue of the Company’s common stock at the datetime of grantthe grant. For performance-based share-based payment awards, the Company recognizes compensation cost over the performance period when achievement of the milestones and expire up to ten years from the date of grant. These options generally vest on the grant date or over a one- year period.targets is probable.
The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment.
Expected Term - The expected term of options represents the period that the Company’s stock-based awards are expected to be outstanding based on the simplified method, which is the half-life from vesting to the end of its contractual term.
Expected Volatility - The Company computes stock price volatility over expected terms based on its historical common stock trading prices.
Risk-Free Interest Rate - The Company bases the risk-free interest rate on the implied yield available on U. S. Treasury zero-coupon issues with an equivalent remaining term.
F-19
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
Expected Dividend - The Company has never declared or paid any cash dividends on its common shares and does not plan to pay cash dividends in the foreseeable future, and, therefore, uses an expected dividend yield of zero in its valuation models.
The Company elected to account for forfeitedforfeitures of awards as they occur, as permitted by ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09"). Ultimately, the actual expenses recognized over the vesting period will be for those shares that vested.occur.
Income (loss) Per Share
Basic net income (loss) per share (“EPS”) of common stock is computed by dividing net income (loss) 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 share units (“RSUs”) and the holdback of 70,165 shares as security for the ESS Metron sellers’ indemnification obligations under the membership interest purchase agreement from the net loss per share calculation.
Since the Company has only incurred losses, basic and diluted net loss per share is the same. Securities that could potentially dilute loss per share in the future were not included in the computation of diluted loss per share at December 31, 2021, 2020 and 2019 because their inclusion would be anti-dilutive are as follows:
December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Warrants to purchase common stock | 63,000 | 2,061,770 | 3,574,257 | |||||||||
Options to purchase common stock | - | 12,000 | 12,000 | |||||||||
Unvested restricted stock awards | 4,015,146 | 633,305 | 1,524,499 | |||||||||
Convertible Series B preferred shares | 2,199 | 4,199 | 4,199 | |||||||||
Total | 4,080,345 | 2,711,274 | 5,114,955 |
Recently Issued and Adopted Accounting Pronouncementsissued accounting pronouncements
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 consolidated financial statementsConsolidated Financial Statements and assures that there are proper controls in place to ascertain that the Company’s consolidated financial statementsConsolidated Financial Statements properly reflect the change.
In December 2023, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). ASU 2023-09 expands existing income tax disclosures for rate reconciliations by requiring disclosure of certain specific categories and additional reconciling items that meet quantitative thresholds and expands disclosures for income taxes paid by requiring disaggregation by certain jurisdictions. ASU 2023-09 is effective for annual periods beginning after December 15, 2024; early adoption is permitted. The Company does note expect the updated guidance to have a material impact on its disclosures.
In December 2023, the FASB issued ASU 2023-08, Intangibles - Goodwill and Other - Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets, which establishes accounting guidance for crypto assets meeting certain criteria. Bitcoin meets this criteria. The amendments require crypto assets meeting the criteria to be recognized at fair value with changes recognized in net income each reporting period. Upon adoption, a cumulative-effect adjustment is made to the opening balance of retained earnings as of the beginning of the annual reporting period of adoption. ASU 2023-08 is effective for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. Early adoption is permitted. The Company elected to early adopt ASU 2023-08 for the year ended December 31, 2023. As a result of the adoption, the Company recorded a cumulative effect adjustment to its Accumulated deficit balance of approximately $6.0 million as of January 1, 2023, as a result of recognizing its Bitcoin held as of January 1, 2023, at fair value. See Note 21. Impacts of Adoption of ASU 2023-08 for a summary of the impacts on the Company’s interim Condensed Consolidated Statements of Operations provided during the year ended December 31, 2023.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07 is intended to enhance reportable segment disclosures by requiring disclosures of significant segment expenses regularly provided to the CODM, requiring disclosure of the title and position of the CODM and explanation of how the reported measures of segment profit and loss are used by the CODM in assessing segment performance and allocation of resources. ASU 2023-07 is effective for the Company for annual periods beginning after December 31, 2023; early adoption is permitted. The updated guidance is not expected to have a material impact on the Company’s disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which was codified with its subsequent amendments as ASCAccounting Standards Codification (“ASC”) Topic 326, Financial Instruments – Credit Losses(“ASC 326”). ASC 326 seeks to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments, including trade receivables, and other commitments to extend credit held by a reporting entity at each reporting date. The amendments require an entity to replace the incurred loss impairment methodology in other U.S. GAAP with a methodology that reflects current expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The updated guidance is effective for the Company for annual reporting periods beginning after December 15, 2022, and early adoption is permitted. In connection with the Company’s acquisitions during the year ended December 31, 2021, the Company adopted this standard on January 1, 2021, and the adoption did not have a material impact on the financial statements and related disclosures.
F-20
Riot Blockchain, Inc. and Subsidiaries
F-17
(in thousands, except for share and per share amounts)
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company adopted this standard on January 1, 2020 and the adoption did not have a material impact on the financial statements and related disclosures.
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 will be 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 financial statements or disclosures.
Note 4.3. Acquisitions
Acquisition of Corsicana Facility land site
During the year ended December 31, 2022, the Company initiated a large-scale development to expand its Bitcoin mining and data center hosting capabilities with the acquisition of a 265-acre site in Navarro County, Texas, strategically located next to the Navarro switch, for $10.1 million, where its anticipated one-gigawatt Bitcoin mining and data center facility complex, the Corsicana Facility, is under development. See Note 7. Property and Equipment, for more information about the Corsicana Facility.
Acquisition of ESS Metron
On December 1, 2021, the Company acquired 100% of the equity interests of 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. Thefeet 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 enhanced the Company’s ability to scale its Bitcoin Mining and Data Center Hosting operations.
The acquisition-date fair value of the totalTotal consideration transferred of $56.9 million was comprised of $25a cash payment of approximately $30.1 million, net of $3.7 million of cash, adjusted for net working capital and other items,seller transaction costs, and 715,413 shares of the Company’s common stock no par value, with aan acquisition date fair value of approximately $26.7 million. Of the 715,413 shares of common stock, 645,248 were issued upon closing and the remaining 70,165 were withheld as security for the sellers’ indemnification obligations for 18 months following the transaction closing date.
TheDuring the year ended December 31, 2023, the indemnification period ended and all 70,165 of the withheld shares were issued to the ESS Metron Acquisition was accounted for usingsellers.
Other than an insignificant post-closing settlement of preliminary net working capital, there were no adjustments to the acquisition method of accounting in accordance with ASC 805, which requires recognition of assets acquired and liabilities assumed at their respective fair values on the date of acquisition. As of December 31, 2021, the Company has completed a preliminary allocation of the purchase consideration. Therefore, the allocation of theprovisional purchase price to assets acquired and liabilities assumed is based on provisional estimates and is subject to continuing management analysis, with assistance from third party valuation advisors.fair value estimates. The Company expects to finalizefinalized the valuation of thesethe acquired assets and liabilities, and consideration transferred, as soon as practicable, but not later than one year fromin December 2022.
The following table presents the acquisition date. Any changes to the preliminary estimatesallocation 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.purchase consideration:
During the period ended December 31, 2021, the Company continued reviewing its valuations of the assets acquired and liabilities assumed in the December 1, 2021 acquisition of ESS Metron based on new information obtained about facts and circumstances that existed as of the acquisition date.
F-21
| | | |
Cash and cash equivalents |
| $ | 549 |
Accounts receivable | |
| 9,879 |
Prepaid and other current assets | |
| 636 |
Inventory and work-in-progress | |
| 1,175 |
Costs and estimated earnings in excess of billings | |
| 13,205 |
Property and equipment | |
| 4,501 |
Intangible assets | |
| 14,000 |
Right of use asset | |
| 6,714 |
Accounts payable | |
| (9,235) |
Accrued expenses | |
| (1,239) |
Billings in excess of costs and estimated earnings | |
| (5,883) |
Operating lease liabilities | |
| (6,714) |
Warranty liability | |
| (116) |
Total identifiable assets and liabilities acquired | |
| 27,472 |
Goodwill | |
| 29,379 |
Total purchase consideration | | $ | 56,851 |
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
Any necessary adjustments will be finalized within one year from the date of acquisition (in thousands):
Cash and cash equivalents | $ | 549 | ||
Accounts receivable | 9,879 | |||
Prepaid and other current assets | 636 | |||
Inventory and work-in-progress | 1,175 | |||
Costs and estimated earnings in excess of billings | 13,205 | |||
Property and equipment | 4,501 | |||
Intangible assets | 14,000 | |||
Right of use asset | 6,714 | |||
Accounts payable | (9,235 | ) | ||
Accrued expenses | (1,239 | ) | ||
Billings in excess of costs and estimated earnings | (5,883 | ) | ||
Operating lease liabilities | (6,714 | ) | ||
Warranty liability | (116 | ) | ||
Total identifiable assets and liabilities acquired | 27,472 | |||
Goodwill | 29,379 | |||
Total purchase consideration | $ | 56,851 |
The $56.9 million total purchase price consideration consisted of $26.7 million fair value of Riot common shares issued, a $30.1 million cash payment (net of $3.7 million of Seller transaction costs). Goodwill represents the excess of total purchase consideration over the preliminary fair value of the underlying assets acquired and liabilities assumed. Goodwill iswas attributable to the assembled workforce of experienced personnel at ESS Metron and synergies expected to be achieved from the combined operations of Riot and ESS Metron. The goodwill recognized is expected to be deductible for tax purposes. We assigned the goodwill to our Engineering segment. See Note 18, “Segment Information”.
In accordance with ASC 815, theThe Company determined that the 70,165 shares withheld meetmet the conditions necessary to be classified as equity because the consideration iswas indexed to the Company’s own equity, there arewere no exercise contingencies based on an observable market not based on its stock or operations, settlement iswas consistent with a fixed-for-fixed equity instrument, the agreement containscontained an explicit number of shares and there arewere no cash payment provisions. Additionally, based on these assessments, the Company determinedrecorded the shares be recorded at fair value on the acquisition date, similar to escrowed shares or securities and accounted for them in total consideration transferred. This consideration relatesrelated to representations and warranties of circumstances that existed as of the
F-18
acquisition date and which the Company believesbelieved to be accurate, with future issuance of the share consideration deemed likely to occur.
The fair values of cash and cash equivalents, accounts receivable, prepaid and other current assets, inventory and work-in-progress, accounts payable, accrued expenses, and warranty liability were determined to be the carrying values due to the short-term nature of the assets and liabilities. The fair value of the acquired trade receivables was determined to be the net realizable amount of the closing date book value of $9.9 million.
Contract assets consistconsisted of costs and estimated earnings in excess of billings on uncompleted contracts and unearned revenue consists of billings in excess of costs and estimated earnings on uncompleted contracts. The fair values of these assets and liabilities were determined to be the carrying values due to the short-term nature of the underlying project contracts incurring costs and the associated customer billings.
The fair value of property and equipment was estimated by applying the cost approach. The cost approach uses the replacement or reproduction cost as an indicator of fair value. The assumptions of the cost approach include replacement cost new, projected capital expenditures, and physical deterioration factors including economic useful life, remaining useful life, age, and effective age.
F-22
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
Intangible assets reflect the identifiable intangible assets acquired, consisting of customer relationships, a trademark and UL Listings. Customer relationships are assigned an estimated useful life of approximately 10 years based on the low attrition of the customer base, in part due to the customized nature of the Company’s products. Fair value of the customer relationships was estimated by applying an income approach – multi period excess earnings method. The fair value was determined by calculating the present value of estimated future operating cash flows generated from the existing customers less costs to realize the revenue. The Company applied a discount rate of 21%, which reflected the nature of the assets as they relate to the risk and uncertainty of the estimated future operating cash flows. Other significant assumptions used to estimate the fair value of the customer contracts includeincluded an assumed income tax rate of 25%.
Although ESS Metron hashad been in business for over 60 years, the trademark was only assigned a 10-year life due to the Company obtaining more data center customers where the longevity of the projects may be shorter than have been historically. Fair value of the trademark was estimated by applying the relief from royalty rate method. The fair value was determined by applying an estimated royalty rate to revenues,revenue, measuring the value the Company would pay in royalties to a market participant if it did not own the trademark and had to license it from a third party.
UL Listings were assigned a 12-year life. A UL Listing means that independent safety organization UL, LLC has tested representative samples of a product and determined that the product meets specific, defined requirements. These requirements are often based on UL’s published and nationally recognized Standards for Safety. Although the UL Listing certifications do not expire, due to technological improvements in similar products, particularly in the data center industry, a 12-year life was assumed. Fair value of the UL Listings was estimated by applying an estimated developer’s profit margin of approximately 4.5% to estimated costs to be incurred over an estimated six months to re-acquire the UL Listings. The Company applied a discount rate of 15%, which reflected the short time necessary to re-acquire the asset.
The right of use asset and operating lease liabilities consistconsisted of two operating leases of the manufacturing facility in Denver, CO.Colorado. These leases havehad combined annual payments of approximately $0.9 million and have remaining lease terms of approximately 3.5 and 10 years.years as of acquisition.
The operating results of ESS Metron have been included in the Company’s consolidated statementsConsolidated Statements of operationsOperations since the acquisition date. During the year ended December 31, 2021, theThe Company recognized $2.1 million of acquisition-related costs related to this acquisition that were expensed as incurred.
The financial results of the acquisition have been included in the Company’s consolidated financial statements from the closing of the acquisition. From the December 1, 2021 acquisition date through December 31, 2021, ESS Metron’s total revenue and net income was approximately $4.2 million and $0.2 million, respectively.
Acquisition of Whinstone
On May 26, 2021, the Company acquired 100% of the equity interests of Whinstone US, Inc., the owner and operator of a Bitcoin mining and hosting facility, for approximately $460 million.the Rockdale Facility. The assets and operations of Whinstone increasesincreased the scale and scope of Riot’s operations, which is a foundational element in the Company’s strategy to become an industry-leading Bitcoin mining platform on a global scale.
The acquisition-date fair value of the totalTotal consideration transferred of $460.4 million was comprised of $80 million of cash, adjusted for net working capital and other items, and 11.8 million shares of the Company’s common stock, no par value, with a fair value of approximately $326 million. As part of cash at closing, net debt outstanding from Whinstone to its parent (Seller) totaling approximately $38 million was repaid as part of cash paid and certain seller transaction costs were paid. The Company also agreed to pay Seller up to approximately $86 million (undiscounted) in additional consideration if certain future power credits are realized by Whinstone.
The purchase price was funded through a combination of existing cash and issuance of equity securities.
F-23
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
The Whinstone Acquisition was accounted for using the acquisition method of accounting in accordance with ASC 805, which requires recognition of assets acquired and liabilities assumed at their respective fair values on the date of acquisition. As of December 31, 2021, the Company has completed a preliminary allocation of the purchase consideration. Therefore, the allocation of the purchase price to assets acquired and liabilities assumed is based on provisional estimates and is subject to continuing management analysis, with assistance from third party valuation advisors. The Company expects to finalize the valuation of these assets and liabilities, and consideration transferred, as soon as practicable, but not later than one year from the Acquisition Date. Any changes to the preliminary estimates of the fair value of the assets acquired and liabilities assumed will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill.
During the period ended December 31, 2021, the Company continued reviewing its valuations of the assets acquired and liabilities assumed in the May 26, 2021 acquisition of Whinstone based on new information obtained about facts and circumstances that existed as of the acquisition date. During the period May 26, 2021 through December 31, 2021, due to further analysis of the operating forecast used in the acquisition date valuation, the Company recorded preliminary measurement period adjustments of approximately $90.3 million to decrease the value of its customer relationship intangible assets, $37.8 million to decrease the value of its acquisition date deferred tax liabilities and $0.2 million to increase its acquisition date right of use asset, with the corresponding adjustments to goodwill.
Any necessary adjustments will be finalized within one year from the date of acquisition ($ in thousands):
Cash and cash equivalents | $ | 10,400 | ||
Accounts receivable | 1,072 | |||
Prepaid expenses and other current assets | 2,176 | |||
Property and equipment | 91,707 | |||
Derivative asset | 13,967 | |||
Right of use asset | 6,547 | |||
Security deposits | 1,775 | |||
Future power credits(1) | 82,953 | |||
Accounts payable | (12,853 | ) | ||
Accrued expenses | (504 | ) | ||
Deferred revenues and customer deposits | (34,856 | ) | ||
Operating lease liabilities | (8,184 | ) | ||
Total identifiable assets and liabilities acquired | 154,200 | |||
Goodwill(2) | 306,184 | |||
Total purchase consideration | $ | 460,384 |
|
|
|
|
The $460.4 million total purchase price consideration consisted of $326.2 million fair value of Riot common shares issued, a $53.0 million cash payment (including $38.1 million of debt payoff and certain Sellerseller transaction costs), 11.8 million shares of the Company’s common stock with an acquisition date fair value
F-19
of approximately $326.2 million, an $83.0 million contingent purchase price payable to the Seller (see Note 17. Commitments and Contingencies), and other net items of $(1.7 million).
There were no adjustments to the provisional purchase price and fair value estimates. The Company finalized the valuation of these assets and liabilities, and consideration transferred, in May 2022.
F-24The following table presents the allocation of the purchase consideration:
Riot Blockchain, Inc. and Subsidiaries
| | | |
Cash and cash equivalents |
| $ | 10,400 |
Accounts receivable | |
| 1,072 |
Prepaid expenses and other current assets | |
| 2,176 |
Property and equipment | |
| 91,707 |
Derivative asset | |
| 13,967 |
Right of use asset | |
| 6,547 |
Security deposits | |
| 1,775 |
Future power credits | |
| 82,953 |
Accounts payable | |
| (12,853) |
Accrued expenses | |
| (504) |
Deferred revenue and customer deposits | |
| (34,856) |
Operating lease liabilities | |
| (8,184) |
Total identifiable assets and liabilities acquired | |
| 154,200 |
Goodwill | |
| 306,184 |
Total purchase consideration | | $ | 460,384 |
NotesGoodwill represented the excess of total purchase consideration over the fair value of the underlying assets acquired and liabilities assumed. Goodwill was attributable to Consolidated Financial Statementsthe assembled workforce of experienced personnel at Whinstone and synergies expected to be achieved from the combined operations of Riot and Whinstone. None of the goodwill recognized is expected to be deductible for tax purposes. We assigned the goodwill to our Data Center Hosting segment.
(in thousands, except for share and per share amounts)
As part of the share purchase agreement Riot entered into with the Sellerseller in connection with the Whinstone Acquisition, Riot iswas obligated to Sellerthe seller to pay up to a maximum amount of $86$86.0 million, net of income taxes, as defined under the stock purchase agreement (undiscounted) of additional consideration if certain power credits arewere received or realized by Whinstone. Those power credits arose from the February 2021 weather event. The purchase price included the estimated fair value of the contingent consideration at the Whinstone Acquisition Date of approximately $83$83.0 million. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820. The significant assumptions used to estimate the fair value are described in Note 14, “Fair Value Measurements”.measurement. These assumptions for the power credits whose utilization by Whinstone is contingent on ERCOT’s future power billings, includeincluded the timing of receipt or realization of the power credits, estimates of future power consumption, the discount rate and credit risk of the Company and the owing party (ERCOT).
The fair value of the acquired trade receivables was determined to be the net realizable amount of the closing date book value of $1.1 million.
The fair value of the acquired long-term other asset of approximately $83$83.0 million relatesrelated to the estimated amount of power credits due Whinstone from the February 2021 weather event. We estimated the fair value of the power credits to be the same as that of the contingent consideration arrangement because the Company is required to remit to the Sellerseller in cash as additional consideration the amount of such power credits received or realized by Whinstone. See discussion above on contingent consideration.
The derivative asset acquired pertainspertained to Whinstone’s Power Supply Agreement. Fairthe PPA. The fair value of the contract of approximately $14$14.0 million was estimated by applying a discounted debt-free cash flow approach. This fair value measurement iswas based on significant inputs not observable in the market and thus representsrepresented a Level 3 measurement as defined in ASC 820. The significant assumptions used to estimate fair value of the derivative contract includeincluded 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.
The fair value of property and equipment was estimated by applying the cost approach. The cost approach uses the replacement or reproduction cost as an indicator of fair value. The assumptions of the cost approach includeincluded replacement cost new,costs, projected capital expenditures, and physical deterioration factors including economic useful life, remaining useful life, age, and effective age.
F-20
The operating results of Whinstone have been included in the Company’s consolidated statementsConsolidated Statements of operationsOperations since the Acquisition Date. During the year ended December 31, 2021, theacquisition date. The Company recognized $19.1 million of acquisition-related costs that were expensed as incurred.
The financial results of the acquisition have been included in the Company’s consolidated financial statementsConsolidated Financial Statements from the closing of the acquisition. From the May 26, 2021 acquisition date through December 31, 2021, Whinstone’s total revenue and net income was approximately $24.5 million and $1.2 million, respectively.
F-25
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
Pro Forma Information (Unaudited)
The following unaudited pro forma financial information summarizes the combined results of operations for Riot, Whinstone and ESS Metron as if the companies were combined as of January 1, 2020. The unaudited pro forma information does not reflect the effect of costs or synergies that may result from the acquisition. The pro forma information excludes acquisition-related costs of $21.2 million during the year ended December 31, 2021. 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).
Years Ended December 31, | ||||||||
2021 | 2020 | |||||||
Total revenue | $ | 237,650 | $ | 73,608 | ||||
Net loss | $ | 9,615 | $ | 51,890 |
Asset Purchase Agreement with Prive Technologies LLC
On February 21, 2018, the Company and Kairos, completed an asset purchase under an agreement (the “Prive Purchase Agreement”) with Prive. Upon closing of the transaction, Kairos became the owner of Prive equipment used for the mining of cryptocurrency, including, but not limited to, 3,800 Bitmain Antminer S9s. The equipment was recorded for a purchase price of approximately $19.5 million as follows (in thousands):
Cash consideration | $ | 11,000 | ||
Fair value of common stock | 8,480 | |||
Other expenses | 2 | |||
Total | $ | 19,482 |
As part of the Prive Purchase Agreement, 200,000 shares of the Company’s common stock were held in escrow (the “Escrow Shares”). No value was assigned to the Escrow Shares at the time of the acquisition as they were contingent consideration. The Escrow Shares would have been released to the Sellers upon the Company generating net cash flow of at least $10.0 million from the equipment. If the Escrow Shares were not released to the Sellers on or before the two-year anniversary (February 2020) of the Prive Purchase Agreement, the Escrow Shares would be returned to the Company for cancellation. In February 2020, the conditions were not achieved and after receiving notification on March 4, 2020, the escrow agent returned and canceled the 200,000 shares.
Acquisition of Logical Brokerage Corp.
On March 26, 2018, the Company entered into an asset acquisition with Logical Brokerage Corp. The Company purchased 9.25 shares of Logical Brokerage, representing 92.5% of the outstanding capital stock of Logical Brokerage, for a cash purchase price of $0.6 million. Logical Brokerage, a futures introducing broker headquartered in Miami, Florida is registered with the CFTC and is a member of the NFA. The asset was recorded at the purchase price of $0.6 million, net of cash received with the asset acquisition of $0.1 million, plus any transaction costs. The CFTC license was recorded as intangible rights acquired.
The Company made the decision, effective as of December 31, 2019 not to pursue its RiotX / Logical Brokerage business development plan. Under the guidance of ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, the Company determined that the discontinuation of RiotX / Logical Brokerage did not represent a strategic shift that would have a major effect on the Company’s operations and financial results. The Company accounted for the discontinuation as an impairment of an intangible asset acquired, and as of December 31, 2019, recorded an impairment expense of approximately $0.7 million and recorded an income tax benefit of approximately $0.1 million, which are reflected in the accompanying consolidated statements of operations.
F-26
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
Note 5.4. Revenue from Contracts with Customers
We recognize revenue when we transfer promised services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those services.
Disaggregated revenue
The following table presents the Company’s revenuesRevenue disaggregated into categories based on the nature of such revenues (in thousands):by reportable segment is presented in See Note 20. Segments Information.
Schedule of Disaggregated Revenue:
Years Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Mining | $ | 184,422 |
| $ | 11,984 |
| $ | 6,741 | ||||
Hosting | 24,546 | - | - | |||||||||
Engineering | 4,178 | - | - | |||||||||
Other | 97 |
| 97 |
| 96 | |||||||
Total revenue | $ | 213,243 | $ | 12,081 | $ | 6,837 |
Contract balances
For the years ended December 31, 2021, 2020 and 2019, the Company did not recognize material bad-debt expense. Contract assets consist of costs and estimated earnings in excess of billings onrelate to uncompleted engineeringEngineering contracts. The balance was entirely from the ESS Metron acquisition and was $9.9 million and $0 asAs of December 31, 20212023 and 2020,2022, contract assets were $15.4 million and $19.7 million, respectively.
The Company’s contractContract liabilities primarily relate to upfront payments and consideration received from customers for data center hosting, billings in excess of costsData Center Hosting services and estimated earnings onDeferred revenue relates to uncompleted engineering contracts and the upfront license fee generated from our legacy animal health business.Engineering contracts. The following table below presents changes in the totalcontract liabilities and deferred revenue liability, for the years ended December 31, 2021 and 2020 (in thousands):
Years Ended December 31, | ||||||||
2021 | 2020 | |||||||
Beginning balance | $ | 776 |
| $ | 873 |
| ||
Acquired contract balances | 34,424 | - | ||||||
Revenue recognized from acquired contract balances | (1,500 | ) | - | |||||
Termination of an acquired customer contract | (5,700 | ) | - | |||||
Revenue recognized that was included in the beginning balance | (97 | ) | (97 | ) | ||||
Ending balance | $ | 27,903 | $ | 776 |
F-27
| | | | | | |
|
| Years Ended December 31, | ||||
| | 2023 |
| 2022 | ||
Beginning balance | | $ | 29,197 | | $ | 27,903 |
Revenue recognized | |
| (11,226) | |
| (6,805) |
Other changes in contract liabilities | | | 4,361 | | | 8,099 |
Ending balance | | $ | 22,332 | | $ | 29,197 |
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial StatementsRemaining performance obligation
(in thousands, except for share and per share amounts)
Transaction price allocated toThe following table presents the estimated future recognition of the Company’s remaining performance obligations,
Remaining performance obligations which represent the transaction price of current contracts for work that has not yet beento be performed. Amounts related
| | | | | | | | | | | | | | | | | | | | | |
| | 2024 |
| 2025 |
| 2026 |
| 2027 | | 2028 |
| Thereafter |
| Total | |||||||
Data Center Hosting |
| $ | 2,362 |
| $ | 2,362 |
| $ | 2,362 |
| $ | 2,362 | | $ | 2,362 |
| $ | 5,964 |
| $ | 17,774 |
Engineering |
| | 4,073 |
| | — |
| | — |
| | — | | | — |
| | — |
| | 4,073 |
Other | | | 97 | | | 97 | | | 97 | | | 97 | | | 97 | | | — | | | 485 |
Total contract liabilities | | $ | 6,532 | | $ | 2,459 | | $ | 2,459 | | $ | 2,459 | | $ | 2,459 | | $ | 5,964 | | $ | 22,332 |
F-21
Riot Platforms, Inc.
Notes to cryptocurrency mining are not included becauseConsolidated Financial Statements
Note 5. Bitcoin
The following table presents information about the Company’s Bitcoin balance held:
| | | | | | |
|
| | Quantity |
| Amounts | |
Balance as of January 1, 2022 |
| | 4,884 | | $ | 150,593 |
Revenue recognized from Bitcoin mined |
| | 5,554 | |
| 156,870 |
Proceeds from sale of Bitcoin |
| | (3,425) | |
| (79,529) |
Exchange of Bitcoin for employee compensation | | | (39) | | | (1,495) |
Realized gain on sale/exchange of Bitcoin |
| | — | |
| 30,346 |
Impairment of Bitcoin |
| | — | |
| (147,365) |
Balance as of December 31, 2022 |
| | 6,974 | |
| 109,420 |
Cumulative effect upon adoption of ASU 2023-08 | | | — | | | 5,994 |
Revenue recognized from Bitcoin mined |
| | 6,626 | |
| 188,996 |
Bitcoin receivable | | | (21) | | | (878) |
Proceeds from sale of Bitcoin |
| | (6,185) | |
| (176,219) |
Exchange of Bitcoin for employee compensation | | | (32) | | | (869) |
Change in fair value of Bitcoin |
| | — | |
| 184,734 |
Balance as of December 31, 2023 |
| | 7,362 | | $ | 311,178 |
| | | | | | |
Carrying value of Bitcoin as of December 31, 2023(a) | | | | | $ | 199,928 |
Realized gains on the sale of Bitcoin for the year ended December 31, 2023(b) | | | | | $ | 80,174 |
(a) | The carrying value of Bitcoin is equal to the post-impairment value of all Bitcoin held as of the adoption of ASU 2023-08 on January 1, 2023, and, for Bitcoin produced subsequent to the adoption ASU 2023-08, the initial value of the Bitcoin as determined for revenue recognition purposes. |
(b) | Bitcoin is sold on a FIFO basis. During the year ended December 31, 2023, gains were recognized on all sales of Bitcoin and are included in Change in fair value of Bitcoin on the Consolidated Statements of Operations. |
All additions of Bitcoin were the result of Bitcoin generated by the Company’s Bitcoin Mining operations (see Note 4. Revenue from Contracts with Customers). All dispositions of Bitcoin were the result of sales on the open market to fund Company operations and for compensation for certain employees.
Note 6. Investments
Convertible note
During the year ended December 31, 2023, the Company electedinvested in a $4.5 million convertible note at face value. The convertible note has a three-year term and earns interest at a rate of 12% per annum, which may be paid in cash or in-kind, and converts into equity of the practical expedient to not disclose amounts related to contracts with a durationissuer of one year or less.
Hosting and Engineering revenue – remaining performance obligationthe convertible note at the end of the three-year term.
The table below presents estimated revenue expected to beconvertible note is accounted for as an available-for-sale debt instrument and is recognized at fair value in Other long-term assets on the Consolidated Balance Sheets. Unrealized changes in the fair value of the convertible note are recognized in Other comprehensive income (loss) on the future related toConsolidated Statements of Comprehensive Income (Loss). Interest income is recognized within Interest income (expense) on the unsatisfied portionConsolidated Statements of Operations.
The fair value measurement of the performance obligation at December 31, 2021 (in thousands):
(in thousands) | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | ||||||||||||||||||
Hosting(1) | 3,414 | 3,414 | 3,414 | 3,414 | 8,304 | 21,960 | ||||||||||||||||||
Engineering | 5,264 | - | - | - | - | 5,264 | ||||||||||||||||||
Total contract liabilities(2) | $ | 8,678 | $ | 3,414 | $ | 3,414 | $ | 3,414 | $ | 8,304 | $ | 27,224 |
|
|
|
|
Other revenue – remaining performance obligation
As of December 31, 2021convertible note is based on significant inputs not observable in the market and 2020, the aggregate amount remainingthus represents a Level 3 measurement. The significant assumptions used to estimate fair value of the upfront license fee,convertible note included a discount rate of 12.3%, which reflected the issuance date spread premium over the selected yield for the rightremaining time to access certain intellectual property relatingmaturity. The issuance date discount rate of 14.0% reflected an estimated required return for mezzanine financing after taking into consideration the principal of the convertible note and the investee’s early stage of development.
F-22
Riot Platforms, Inc.
Notes to the Company’s Animal Health assets, was approximately $0.7 million and $0.8 million, respectively. The fee is being recognized ratably over the license term, which ends in 2028.Consolidated Financial Statements
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 information about our cryptocurrencies (Bitcoin):the convertible note:
December 31, 2021 | December 31, 2020 | |||||||
Beginning balance | $ | 11,626 | $ | 3,839 | ||||
Revenue recognized from cryptocurrencies mined | 184,422 | 11,838 | ||||||
Proceeds from sale of cryptocurrencies | (295 | ) | (8,298 | ) | ||||
Realized gain on sale/exchange of cryptocurrencies | 253 | 5,184 | ||||||
Impairment of cryptocurrencies | (36,462 | ) | (989 | ) | ||||
Cryptocurrencies received from sale of equipment | - | 52 | ||||||
Ending balance | $ | 159,544 | $ | 11,626 |
| | | |
Investment |
| $ | 4,500 |
Accrued interest |
|
| 59 |
Amortized costs basis |
|
| 4,559 |
Unrealized holding gains (losses) in accumulated other comprehensive income | | | 150 |
Fair value as of December 31, 2023 |
| $ | 4,709 |
During 2021, all cryptocurrency activity
The Company determined that the issuer of the convertible preferred note was from Bitcoin. During 2020, all but less than $0.1 million was from Bitcoin.
During 2021, 2020a variable interest entity (“VIE”) and 2019,that the Company recorded impairment charges onheld a variable interest in the issuer of the convertible preferred note. The Company has considered the amount it is contributing to the issuer, its cryptocurrency holdingslack of $36.5decision-making rights and control, among other factors, and has concluded that it does not hold a controlling financial interest and does not have majority decision-making control. Therefore, the Company is not the primary beneficiary of the VIE, and as a result, the Company is not required to consolidate the VIE. The entire $4.5 million $1.0 million and $0.8 million, respectively.
F-28
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
Note 7. Investments in Marketable Equity Securities and Long-term Investments
Investments in Marketable Equity Securitiesinvestment is at risk of loss.
Coinsquare and Mogo
In September 2017, and February 2018, the Company acquired a minority interest for $9.4 million in Coinsquare Ltd., a Canadian cryptocurrency exchange (“Coinsquare”), which operates a digital crypto currencycryptocurrency exchange platform in Canada. The investment resulted in an ownership in Coinsquare by the Company of approximately 11.7% ownership in Coinsquare on a fully diluted basis. The Company evaluated the guidance in ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, and elected to account for the investment using the measurement alternative as the equity securities are without a readily determinable fair value and do not give the Company significant influence over Coinsquare. ThePer the measurement alternative, the investment is recorded at cost, less any impairment, plus or minus changes resulting from observable price changes.
During June 2020, the Company became aware of allegations brought by the Ontario Securities Commission (the “OSC”) that Coinsquare and certain of its executives and directors engaged in systematic “wash trading” of cryptocurrencies on its Coinsquare market to manipulate the market’s trading volume during 2018 and 2019.
On July 21, 2020, a hearing panel of the OSC entered an order (the “Order”) approving the settlement agreement between OSC, Coinsquare, and certain of its executives and directors (the “Settlement Agreement”), in which they admitted to breaches of Ontario securities laws and/or conduct contrary to the public interest including, market manipulation through reporting inflated trading volumes on its Coinsquare Market, misleading its clients and investors about these trading volumes, and taking reprisal against an internal whistleblower who brought this conduct to the attention of the named executives and directors. The Order requires certain oversight and governance procedures and to prohibit the named executives and directors from engaging in certain activities with respect to Coinsquare; additionally, the named executives and directors were required to resign from Coinsquare and Coinsquare and the named executives and directors were required to pay penalties and costs totaling approximately CAD 2.2$2.2 million.
F-29
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
The Company thereupon determined there were indicators that would cause a 100% impairment of the Coinsquare investment and observed price changes which was recorded as of June 30, 2020. The Company thereforeand recorded an impairment expense of $9.4 million for its investment in Coinsquare during the year ended December 31, 2020, as reflected in the accompanying consolidated statements of operations.2020.
During the year ended December 31, 2021, under agreements generally between Coinsquare, Coinsquare’s shareholders (including Riot) and Mogo Inc. (NASDAQ: MOGO) (“Mogo Agreement”), a digital payments and financial technology company (“Mogo”), Riot sold itsall 3.4 million common shares of Coinsquare (the “Coinsquare Shares”) in exchange for approximately 3.2 million common shares of Mogo (the “Mogo Shares”) and approximately US $1.8 million in cash.
During the year ended December 31, 2021, the Company recorded a gain on sale/exchange of long-term investments of $26.3 million for the sale of its shares of Coinsquare. Concurrently, in accordance with ASC 321, wethe Company recorded the fair value of the MOGOMogo shares received in the exchange of $24.8 million in investments in marketable equity securities within current assets on our consolidated balance sheets.the Consolidated Balance Sheets. The fair value was calculated as 3.2 million shares of Mogo common stock multiplied by the fair value of the Mogo shares received. During the year ended December 31, 2021, we recorded an unrealized loss on the shares of approximately $13.7 million based on the closing price per share of Mogo common stock on NASDAQthe Nasdaq Stock Market on December 31, 2021 of $3.42. The daily share price is extremely volatile and may be more or less than the amount recorded as of December 31, 2021.
Long-term Investments
Tess
In 2017, the Company acquired approximately 52% of Tess which is developing blockchain solutions for telecommunications companies. Under the terms of the Purchase Agreement (the “Purchase Agreement”) the Company invested cash of approximately $0.3 million in Tess and issued 75,000 shares of restricted Common Stock to Tess in exchange for 2,708,333 shares of common stock of Tess. The 75,000 shares of Common Stock were valued at the $8.49 market price as of October 20, 2017 for a total of approximately $0.6 million. Accordingly, Tess became a majority-owned subsidiary of the Company. As part of the transaction, the Company and Tess entered into a registration rights agreement pursuant to which the Company agreed to file a registration statement to register the resale of 25,000 shares (of 75,000 shares) of Common Stock issued to Tess. The 2017 acquisition of Tess was accounted for as a business combination in accordance with the provisions of ASC 805. The allocation of purchase consideration includes $0.7 million as in-process research and development (IPR&D) related to the TessPay project. As of December 31, 2018, the Company had $0.6 million of intangibles related to Tess’s internal technology platform.
In January 2018, following the execution of a non-binding letter of intent as of December 11, 2017, the parties executed a definitive agreement providing that Tess agreed to merge with Cresval Capital Corp. (“Cresval”) (TSX-V: CRV). Assuming closing conditions are met, upon closing of the anticipated merger, Tess would be publicly traded on the TSX Venture Exchange (the “TSXV”).
During the year ended December 31, 2018, Tess received approximately $0.5 million from the sale of shares of Riot Blockchain common stock held by Tess, which has been recorded as a credit to the consolidated Common Stock of the Company. Additionally, Tess issued approximately 189,000 of its common shares in exchange for cash proceeds of approximately $220,000 thereby reducing the investment percentage held by2022, the Company from 52.01% to 50.2% as of December 31, 2018. Due to the termination of the Cresval Agreement on February 15, 2019, the Company recorded an impairment loss of $2.1 million consisting of $0.7 million of in process research and development costs, $0.6 million related to capitalized costs of Tess’s internal technology platform and $0.8 million of goodwill during the year ended December 31, 2018.
On April 10, 2019, Tess closed on a funding agreement under which approximately 23.8sold all 3.2 million shares of Tess were issuedits shares of Mogo for CAD $1.2proceeds of $1.8 million, resulting in realized losses of approximately $9.0 million. As a result of this and subsequent funding’s, the Company’s ownership in Tess was reduced to approximately 8.8%. Subsequently Tess was no longer being consolidated in the Company’s consolidated financial statements.
F-30F-23
Riot Blockchain,Platforms, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
As of December 31, 2019, the Company evaluated its remaining interest in Tess under the guidance of ASU 2016-01 and determined it should remeasure its retained interest at fair value upon deconsolidation to establish a new cost basis. As of December 31, 2021 and 2020, the fair value of the Tess shares owned by the Company is approximately $0.1 million, calculated based upon the April 10, 2019 funding price as follows:
Tess shares held by Riot Blockchain, Inc. | 2,708,333 | |||
Per share fair value | $ | 0.03 | ||
Fair value of Tess shares held by Riot Blockchain, Inc. | $ | 90 |
Verady
During November 2017, the Company made a $0.2 million investment in a convertible note as part of a series of notes issued by Verady, LLC (“Verady”). The notes are unsecured, subordinated to other approved liabilities, mature December 31, 2022, bear interest at 6%, unless previously repaid or converted and contain other conditions and restrictions, all as defined under the subscription documents. The Verady convertible note was previously recorded at fair value (which approximates cost). The conversion rate of the convertible note is defined based upon the possible occurrence of certain defined events which may or may not occur. The Company has no other relationship or rights associated with Verady. Founded in 2016, Verady is privately held and recently launched VeraNet, a decentralized network of financial reporting and accounting tools targeted to the needs of the cryptocurrency community.
During the year ended December 31, 2019, Verady completed a financing that under the terms of the Company’s original investment, resulted in the automatic conversion of the Company’s convertible note plus accrued interest totaling approximately $0.2 million, into equity of Verady. The 2019 automatic conversion resulted in an ownership in Verady by the Company of approximately 3.2% on a fully diluted basis. The Company has evaluated the guidance in ASU 2016-01 and elected to account for the investment using the measurement alternative as the equity securities are without a readily determinable fair value and do not give the Company significant influence over Verady. The investment is valued at cost, less any impairment, plus or minus changes resulting from observable price changes. During the year ended December 31, 2021 and 2020, there were no price changes in orderly transactions for identical or similar investments in Verady or Tess.
Note 8.7. Property and Equipment
Property and equipment consistedconsists of the following as of December 31, 2021 and 2020 (in thousands):
Life (Years) | December 31, 2021 | December 31, 2020 | |||||||||
Buildings and improvements |
|
| 10-25 | $ | 88,808 |
| $ | - | |||
Miners and mining equipment |
|
| 2 | 87,921 |
| 14,406 | |||||
Machinery and facility equipment |
|
| 5-7 | 15,613 |
| - | |||||
Office and computer equipment |
|
| 3 | 1,007 | 83 | ||||||
Construction in progress |
|
| 113,598 |
| - | ||||||
Total cost of property and equipment |
|
| 306,947 | 14,489 | |||||||
Less accumulated depreciation |
|
| (30,467 | ) | (4,346 | ) | |||||
Property and equipment, net |
|
| $ | 276,480 | $ | 10,143 |
There were no impairment charges for the years ended December 31, 2021, 2020 and 2019.
F-31
Riot Blockchain, Inc. and Subsidiariesfollowing:
Notes to Consolidated Financial Statements
| | | | | | |
|
| December 31, | | December 31, | ||
|
| 2023 |
| 2022 | ||
Buildings and building improvements | | $ | 348,865 | | $ | 229,685 |
Land rights and land improvements | |
| 10,320 | |
| 10,164 |
Miners and mining equipment | |
| 496,230 | |
| 441,324 |
Machinery and facility equipment | | | 39,144 | | | 35,125 |
Office and computer equipment | |
| 2,108 | |
| 1,206 |
Construction in progress | |
| 166,970 | |
| 97,231 |
Total cost of property and equipment | |
| 1,063,637 | |
| 814,735 |
Less accumulated depreciation | |
| (359,443) | |
| (122,180) |
Property and equipment, net | | $ | 704,194 | | $ | 692,555 |
(in thousands, except for share and per share amounts)
During 2021, we received 34,608 additional Antminer model S19-Pro miners related to its purchase contracts with Bitmain and, as of December 31, 2021, had deployed a total of 30,907 miners in its mining operation. Additionally, we entered into six additional purchase agreements with Bitmain to acquire 52,500 Antminer model S19j (90 Terahash per second) (“TH/s”) miners and 30,000 of their latest Antminer model S19XP (140 TH/s) miners for a combined total purchase price of approximately $535.0 million. Pursuant to these agreements, approximately $301.3 million remains payable to Bitmain in installments in advance of shipment of the miners, which is scheduled to occur on a monthly basis through December 2022.
During the year ended December 31, 2020, the Company purchased 33,646 Bitmain S19-Pro Antminers and as of December 31, 2020 the Company had received 3,043 of the S19-Pro Antminers.
In December 2020, the Company entered into a pilot project with a dual focus of evaluating next-generation immersion technology to increase mining productivity, in addition to evaluating software to reduce energy costs. These technologies have the potential to reduce the Company’s Bitcoin production costs, increase hash rate capacity and significantly extend the life of the Company’s Bitcoin mining ASICs. During June 2021, this pilot project had commenced full operation and the approximate $2.7 million in equipment costs for this project previously not yet operational and included in “Miners and mining equipment” in the table above, commenced being depreciated.
Depreciation and amortization expense related to property and equipment totaled approximately $26.1$246.5 million, $4.3$105.9 million, and $0.1$26.1 million, for the years ended December 31, 2021, 20202023, 2022, and 2019,2021, respectively.
Depreciation is computed onThe Company recognized an impairment charge for its miners and mining equipment during the straight-line basisyear ended December 31, 2022, as described below, but did not incur any other impairment charges for its property and equipment for the periods the assets are in service.years ended December 31, 2023 and 2021.
Construction in progress:
Upon completion of the Whinstone Acquisition, the Company commenced expansion of the Whinstone Facility from its existing 300 MW developed capacity to 700 MW. This expanded BitcoinMiners and mining infrastructure is expected to comprise four new buildings totaling approximately 240,000 square feet, with the capacity to support an estimated 112,000 S19j Antminers based upon current configurations. It is expected that the first portion of this expansion will be completed by Q1 2022 and the balance during Q2 2022. Two of these four buildings are being developed utilizing air-cooling infrastructure, with the optionality to upgrade to immersion-cooling. The other two of these buildings are being developed utilizing immersion-cooling technology, a technique that offers improved cooling performance as compared to air-cooling infrastructure. The expansion of Bitcoin mining infrastructure at Whinstone provides critical capacity for Riot to deploy its future shipments of Bitcoin mining hardware, in addition to providing an opportunity to expand Whinstone’s hosting business for third-party Bitcoin miners.
In November 2021, Riot’s 400 MW expansion at the Whinstone Facility hit multiple progress milestones while navigating the challenges with the current state of the global supply chain. Progress during the month included the completion of the substation expansion to 700 MW, successful installation of the substation busbar, and 400 MW of high-voltage transformers. Whinstone also completed construction of Building F, Riot’s first self-mining building dedicated to immersion-cooled Bitcoin mining, while also advancing on its second immersion-cooled dedicated building, Building G. In December 2021, Whinstone also received most of the structural components required for Buildings D, E, and G. The construction completion timeline is currently on-time, despite global supply chain shortages and delays. A hosting client with its miners in a portion of Building C has now filled the remainder of Building C with its miners.
F-32
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
Commitment:equipment
As of December 31, 2021,2023, the Company had deployed a total of 112,944 miners in its mining operation, all at the Rockdale Facility.
During the year ended December 31, 2023, the Company entered into the Master Agreement to acquire 99,840 miners from MicroBT (consisting of 8,320 M56S+ model miners, 22,684 M56S++ model miners, 20,778 M66 model miners, and 48,058 M66S model miners), primarily for use at the Corsicana Facility, for a total purchase price of approximately $453.4 million, subject to adjustment. Delivery of the miners began in the fourth quarter of 2023, with all miners expected to be received and deployed by mid-2025. The Master Agreement also provides us an option to purchase up to an additional 265,000 additional miners, on the same terms as the initial order.
During the year ended December 31, 2023, the Company sold 2,700 Antminer model S19 XP miners for gross proceeds of $6.4 million, which resulted in a loss on sale of equipment of $5.3 million.
As of December 31, 2022, the Company had outstanding executed purchase agreements for the purchase of miners from Bitmain for a total of 30,495 new S19j-Pro model5,130 S19 series miners, and 30,000 new S19XP model miners, scheduled to be delivered through December 2022, and had paid a depositall of 43% of the total purchase price. A summary of the purchase agreement commitments, deposits paid and expected delivery timing (remaining balances are payablewhich were received in advance of shipping) is summarized as follows (in thousands):
Agreement Date * | Original Purchase Commitment | Open Purchase Commitment | Deposit Balance | Expected Shipping | |||||||
April 5, 2021 | $ | 138,506 | $ | 52,838 | $ | 85,668 | First Quarter 2022 - Fourth Quarter 2022 | ||||
October 29, 2021 | 56,250 | 31,950 | 24,300 | Second Quarter 2022 - Third Quarter 2022 | |||||||
November 22, 2021 | 32,550 | 21,158 | 11,392 | Third Quarter 2022 - Fourth Quarter 2022 | |||||||
December 10, 2021 | 97,650 | 63,472 | 34,178 | Third Quarter 2022 - Fourth Quarter 2022 | |||||||
December 24, 2021 | 202,860 | 131,859 | 71,001 | Third Quarter 2022 - Fourth Quarter 2022 | |||||||
Total | $ | 527,816 | $ | 301,277 | $ | 226,539 |
* Pursuant to the Company’s agreements with Bitmain, the Company is responsible for all shipping charges incurred in connection with the delivery of the miners.
The Company paid approximately $85.7 million as a deposit for the miners to be acquired under the purchase agreement, dated effective as of April 5, 2021, with Bitmain to acquire approximately 42,000 Antminer model S19j Miners, which are scheduled to be shipped in 12 batches of approximately 3,500 miners each, on a monthly basis, through October 2022.
During the fourth quarter ended December 31 2021, the Company entered into purchase agreements with Bitmain to acquire 9,000 S19j Pro (100 TH/s) miners and 30,000 S19XP (140 TH/s) miners, for a total purchase price of approximately $389.3 million, with an anticipated delivery and deployment schedule set for April 2022 through December 2022.
Note 9. Long-Term Assets
Deposits
Deposits consisted of the following asJanuary 2023. As of December 31, 2021 and 2020 (in thousands):
December 31, 2021 | December 31, 2020 | |||||||
Deposits on equipment |
| |||||||
Beginning balance | $ | 33,093 | $ | 1,449 | ||||
Additions | 274,833 | 33,093 | ||||||
Reclassification to property and equipment | (46,711 | ) | (1,449 | ) | ||||
Ending Balance | 261,215 | 33,093 | ||||||
Security deposits | 4,955 | - | ||||||
$ | 266,170 | $ | 33,093 |
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Riot Blockchain, Inc. and Subsidiaries2023, the Company did not have any outstanding purchase agreements for the purchase of miners from Bitmain.
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
Deposits on Equipment
During the year ended December 31, 2021,2022, the Company paidelected not to renew its co-location mining services agreement with Coinmint, which was therefore terminated automatically per its terms. In connection with the termination, the Company arranged for the transfer of the miners it was operating at Coinmint’s Massena, New York facility (the “Coinmint Facility”). The Company then entered into an equipment exchange agreement with a third-party Bitcoin mining company (the “Counterparty”), whereby the Company transferred approximately $274.85,700 of the Antminer model S19 Pro miners it had previously deployed at the Coinmint Facility to the Counterparty in exchange for 5,000 factory-new Antminer model S19j Pro miners delivered to the Rockdale Facility. After completing the transfer of the miners to the Counterparty, the Company relocated the balance of the miners it had deployed at the Coinmint Facility to the Rockdale Facility. As a result of the exchange with the Counterparty, the Company recognized a gain on the exchange of equipment of approximately $16.3 million as deposits, primarily forduring the year ended December 31, 2022.
Impairment of miners
During the year ended December 31, 2022, adverse changes in business climate, including decreases in the price of Bitcoin and resulting decrease in the market price of miners, indicated that an impairment triggering event had occurred. Testing performed indicated the estimated fair value of the Company’s miners to be less than their net carrying value as of December 31, 2022, and an impairment charge of $55.5 million was recognized, decreasing the net carrying value of the Company’s miners to their estimated
F-24
fair value. The estimated fair value of the Company’s miners was classified in Level 2 of the fair value hierarchy due to the quoted market prices for similar assets.
Casualty-related charges (recoveries), net
In December 2022, the Rockdale Facility was damaged during severe winter storms in Texas. As of December 31, 2023, the Company estimated that total damages of $10.3 million had been incurred. During the year ended December 31, 2023, the Company received net insurance recoveries of $7.5 million. Recoveries are recognized when they are probable of being received.
Construction in progress
As of December 31, 2023, the Company’s expansion of the Rockdale Facility had been completed.
In 2022, the Company initiated development of the Corsicana Facility to expand its Bitcoin Mining and Data Center Hosting capabilities, on a 265-acre site in Navarro County, Texas, located next to the Navarro Switch. Once complete, the Company expects the Corsicana Facility to have one gigawatt of developed capacity for its Bitcoin Mining and Data Center Hosting operations.
The initial phase of the development of the Corsicana Facility involves the construction of 400 MW of immersion-cooled Bitcoin Mining and Data Center Hosting infrastructure, as well as a high-voltage power substation and transmission facilities to supply power and water to the facility. Construction of the substation and the data centers is ongoing and operations are expected to commence by the end of the first quarter of 2024, following commissioning of the substation.
Through December 31, 2023, the Company had incurred costs of approximately $217.8 million related to the development of the Corsicana Facility, including $10.1 million paid to acquire the land on which the facility is being developed, $203.0 million of initial developments costs and equipment, and a $4.7 million deposit for future power usage.
During the year ended December 31, 2023, the Company entered into a purchase agreement with Midas for the purchase of 200 MW of immersion cooling systems for its Corsicana Facility. Delivery of the immersion cooling systems began in the fourth quarter of 2023 and is expected to be completed in the first quarter of 2024. The purchase agreement also provides the Company an option to purchase up to an additional 400 MW of immersion cooling systems from Midas, on the same terms as the initial order, through December 31, 2025.
Related party land transaction
During the year ended December 31, 2022, the Company began an initiative to provide certain on-site temporary housing for stakeholders, including partners, analysts, stockholders, employees, vendors, and other visitors to the Rockdale Facility, which is located in a relatively remote area of central Texas with limited accommodations for visitors. During the year ended December 31, 2023, Riot completed its acquisition of property and land for the development of temporary housing from Lyle Theriot (indirectly, through a limited liability company controlled by Mr. Theriot) for approximately $1.1 million, consisting of $0.2 million for land and $0.9 million for buildings and improvements. At the time of the transaction, Mr. Theriot was part of the management team at Riot and was considered a related party of Riot. The transaction was accounted for as an asset acquisition.
Commitments
During the year ended December 31, 2023, the Company paid $191.1 million in deposits and payments to MicroBT for the purchase of miners pursuant to the Master Agreement described herein. The remaining commitment of approximately $270.4 million is due in installments through approximately April 2025 based on the estimated miner delivery schedule. Total payments of $220.0 million and $50.4 million are expected to be made in 2024 and 2025, respectively.
During the year ended December 31, 2023, the Company paid $31.2 million in deposits and payments to Midas for the purchase of immersion cooling systems described herein. The remaining commitment of approximately $21.1 million is due in installments in early 2024, based on the estimated delivery schedule.
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Note 8. Goodwill and Intangible Assets
Goodwill
During the second quarter of 2022, adverse changes in business climate, including decreases in the price of Bitcoin and increased volatility of equity markets, as evidenced by declines in the market price of the Company’s securities, those of its peers, and major market indices, 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 were some of the primary causes for these declines. Additionally, the price of Bitcoin had declined significantly, notably during the second quarter of 2022.
Due to these factors, the Company determined that a triggering event had occurred, and therefore, performed a goodwill impairment assessment as of June 30, 2022. The valuation of the Company’s 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 was based on the markets in which the reporting units operated, 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, in excess of the carrying value of the goodwill. As a result, the entire carrying amount of the goodwill was recognized as a non-cash impairment charge during the year ended December 31, 2022.
Finite-lived intangible assets
The following table presents the Company’s finite-lived intangible assets as of December 31, 2023:
| | | | | | | | | | | |
|
| | | | | | | | | Weighted- | |
| | Gross | | Accumulated | | Net book | | average life | |||
|
| book value |
| amortization |
| value |
| (years) | |||
Customer contracts | | $ | 6,300 | | $ | (1,292) | | $ | 5,008 |
| 10 |
Trademark | |
| 5,000 | |
| (1,042) | |
| 3,958 |
| 10 |
UL Listings | |
| 2,700 | |
| (469) | |
| 2,231 |
| 12 |
Patents | |
| 10,060 | |
| (5,560) | |
| 4,500 |
| Various |
Finite-lived intangible assets | | $ | 24,060 | | $ | (8,363) | | $ | 15,697 | | |
The customer contracts, trademark, and UL listings were recognized as the result of acquisitions during the year ended December 31, 2021 (see Note 3. Acquisitions).
During the year ended December 31, 2022, the Company paid $9.5 million to license a patent for technology being used in the development of the Corsicana Facility. The amount paid is being amortized over the term of the license, which expires on December 31, 2024.
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The following table presents the Company’s finite-lived intangible assets as of December 31, 2022:
| | | | | | | | | | | |
|
| | | | | | | | | | Weighted- |
| | Gross |
| Accumulated |
| Net book | | average life | |||
|
| book value |
| amortization |
| value |
| (years) | |||
Customer contracts | | $ | 6,300 | | $ | (671) | | $ | 5,629 |
| 10 |
Trademark | |
| 5,000 | |
| (542) | |
| 4,458 |
| 10 |
UL Listings | |
| 2,700 | |
| (244) | |
| 2,456 |
| 12 |
Patents | |
| 10,060 | |
| (1,126) | |
| 8,934 |
| Various |
Finite-lived intangible assets | | $ | 24,060 | | $ | (2,583) | | $ | 21,477 | | |
During the years ended December 31, 2023, 2022, and 2021, amortization expense related to finite-lived intangible assets was $5.8 million, $2.1 million, and $0.2 million, respectively.
The following table presents the estimated future amortization of the Company’s finite-lived intangible assets as of December 31, 2023:
| | | |
2024 | | $ | 5,823 |
2025 | |
| 1,355 |
2026 | |
| 1,355 |
2027 | |
| 1,355 |
2028 | |
| 1,355 |
Thereafter | |
| 4,455 |
Total | | $ | 15,697 |
The Company did not identify any impairment of its finite-lived intangible assets during the years ended December 31, 2023, 2022, and 2021.
Note 9. Power Purchase Agreement
In May 2020, the Company, through its subsidiary, Whinstone, entered into the PPA to provide for the delivery of power to its Rockdale Facility, via the nearby Sandow Switch. Pursuant to the PPA, the Company has agreed to acquire a total of 345 MW of long-term, fixed-price power, in multiple blocks, as follows: 130 MW contracted in May 2020, at fixed prices through April 30, 2030; 65 MW contracted in March 2022, at fixed prices through April 30, 2030; and 150 MW contracted in November 2022, at fixed prices through October 31, 2027. Additionally, under the PPA, the Company has the option to purchase additional power at market prices, as needed.
If electricity used exceeds the amount contracted, the cost of the excess electricity is incurred at the then-current spot rate. Concurrently with the PPA, the Company entered into an interconnection agreement for the extension of delivery system transmission/substation facilities to facilitate delivery of the electricity to the Rockdale Facility (the “Facilities Agreement”). Power costs incurred under the Facilities Agreement are determined every 15 minutes using settlement information provided by the ERCOT and are recorded in Cost of revenue on the Consolidated Statements of Operations.
In collaboration with market participants such as the Company, ERCOT has implemented Demand Response Services Programs for customers that have the ability to reduce or modify electricity use in response to ERCOT instructions or signals. These Demand Response Services Programs provide the ERCOT market with valuable reliability and economic services by helping to preserve system reliability, enhancing competition, mitigating price spikes, and stabilizing the grid by encouraging the demand side of the market to give more visibility and control of their power consumption to grid operators. Market participants with electrical loads like the Company may participate in these Demand Response Service Programs directly by offering their electrical loads into the ERCOT markets, or indirectly by voluntarily reducing their energy usage in response to increasing power demand in the ERCOT marketplace.
Under these Demand Response Services Programs, the Company can participate in a variety of programs known as “ancillary services” by electing to designate a portion of its available electrical load for participation in such programs on an hourly basis. For each respective Demand Response Services Program, the Company receives a cash payment based on hourly rates for power, and the amount of electrical load into which it bids. Through ancillary services, the Company competitively bids amongst other market participants to sell ERCOT the ability to control Riot’s electrical load on demand, and to power down when directed to by ERCOT,
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as part of ERCOT’s efforts to stabilize the grid. The Company receives compensation for its participation in ancillary services whether or not the Company is actually called to power down.
Riot also participates in ERCOT’s Four Coincident Peak (“4CP”) program, which refers to the highest-load settlement intervals in each of the four summer months (June, July, August, and September), during which time, demand for power is at its highest. 4CP participants may voluntarily power down operations during these times and in doing so, reduce the electrical load demand on the ERCOT grid. Participants that reduce their load in these peak periods receive credits to transmission costs on future power bills during the subsequent year, reducing overall power costs. As a result of Riot’s participation in 4CP in 2022, the Company’s transmission charges in its 2023 monthly power bills were substantially reduced.
Under the PPA, the Company may also elect not to utilize its long-term, fixed-price power for its operations, and instead elect to sell that power in exchange for credits against future power costs when there is a benefit to the Company, depending on the spot market price of electricity. The Company’s power strategy combines participation in Demand Response Services Programs and sales of power during times of peak demand, to attempt to manage operating costs most efficiently.
During the years ended December 31, 2023, 2022, and 2021, the Company earned credits against future power costs in exchange for power resold of approximately $71.2 million, $27.3 million, and $6.5 million, respectively. These amounts are recorded in Power curtailment credits on the Consolidated Statements of Operations.
The Company determined the PPA meets the definition of a derivative because it allows for net settlement. However, because the Company has the ability to offer the power back for sale, rather than taking physical delivery, the Company determined that physical delivery is not probable through the entirety of the contract and therefore, the Company does not believe the normal purchases and normal sales scope exception applies to the PPA. Accordingly, the PPA (a non-hedging derivative contract) is accounted for as a derivative and recorded at its estimated fair value each reporting period in Derivative asset on the Consolidated Balance Sheets with the change in the fair value recorded in Change in fair value of derivative asset on the Consolidated Statements of Operations. The PPA is not designated as a hedging instrument.
The estimated fair value of the Company’s Derivate asset is classified under Level 3 of the fair value hierarchy due to the significant unobservable inputs utilized in the valuation. Specifically, the Company’s 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 PPA, which is scheduled to end as of April 30, 2030. The significant assumptions used to estimate fair value of the derivative contract include a discount rate of 23.1%, 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. The discount rate includes observable market inputs, but also includes unobservable inputs based on qualitative judgment related to company-specific risk factors.
The terms of the PPA require margin-based collateral, calculated as exposure resulting from fluctuations in the market cost rate of electricity compared to the fixed price stated in the contract. As of December 31, 2023, the margin-based collateral requirement of the Company was zero.
While the Company manages operating costs at the Rockdale Facility in part by periodically selling back unused or uneconomical power, the Company does not consider such actions to be trading activities.
The following table presents changes in the estimated fair value of the Derivative asset:
| | | |
Balance as of December 31, 2022 | | $ | 97,497 |
Change in fair value of derivative asset | |
| 6,721 |
Balance as of December 31, 2023 | | $ | 104,218 |
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Note 10. Deposits
The following table presents the activity of the Company’s deposits paid:
| | | |
Deposits on equipment: |
| |
|
Balance as of December 31, 2022 | | $ | 33,273 |
Additions | |
| 230,397 |
Reclassifications to property and equipment | |
| (78,376) |
Balance as of December 31, 2023 | | | 185,294 |
Security deposits | |
| 29,715 |
Total long-term deposits | | $ | 215,009 |
Deposits on equipment
As of December 31, 2022, the Company had outstanding executed purchase agreements for the purchase of miners from Bitmain for a total of 5,130 S19 series miners, which were received in January 2023. During the year ended December 31, 2023, the Company reclassified $46.7the outstanding deposit of $33.3 million to property and equipment in connection with the receipt of 23,864the miners at the Coinmint Facility and the WhinstoneRockdale Facility. See Note 5, “Revenue7. Property and Equipment.
During the year ended December 31, 2023, the Company paid deposits and advance payments of $191.1 million to MicroBT for the purchase of miners, paid a deposit of $20.8 million to Midas for the purchase of immersion cooling systems, and paid deposits of $18.5 million for other purchases of miners from Contractsvarious suppliers. See Note 7. Property and Equipment.
During the year ended December 31, 2023, $12.6 million of the deposits made to MicroBT, all of the $20.8 million deposit made to Midas, and $11.7 million of the deposits for other purchases of miners were reclassified to property and equipment in connection with Customers”the receipt of the equipment.
Security deposits
During the year ended December 31, 2023, the Company paid $23.0 million as a security deposit in connection with its 215 MW increase to the long-term, fixed-price power secured under the PPA, resulting in a total of 345 MW under contract at fixed prices. See Note 8. Power Purchase Agreement.
During the year ended December 31, 2020,2022, the Company purchased 33,646 model S19, S19-Pro, and S19j-Pro Antminers from Bitmain forpaid approximately $4.7 million as a total purchase price of approximately new miners totals $76.1 million, including $6.6 million paidsecurity deposit for the 3,043 miners delivered during the year ended December 31, 2020, $31.9 million paid as deposits in deposits during the same period, and the remaining $37.6 million due to be paid during the year ending December 31, 2021. As of December 31, 2020, the Company had received 3,043development of the new miners, includingCorsicana Facility, all 1,040 model S19 miners and 2,003 model S19-Pro miners, but had not yet received 30,603 of the new miners, including 18,603 model S19-Pro miners and all 12,000 model S19j-Pro miners. The 30,603 were delivered in monthly shipments through January 2022. Accordingly, the Company recorded the $31.9 million paid during the year ended December 31, 2020 for these outstanding minerswhich remains held as a deposit which includes these miners on the accompanying consolidated balance sheet. (See Note 7, “Investments in Marketable Equity Securities” for additional details.)
During December 2019, the Company purchased 4,000 Bitmain model S17-Pro Antminers from Bitmain for approximately $6.3 million. The Company had received 3,000 of these model S17-Pro miners by December 31, 2019, and, accordingly, they were recorded as assets on the Company’s consolidated balance sheet for the year ended December 31, 2019. However, 1,000 of these S17-Pro miners were not received until February 2020. Therefore, as of December 31, 2019, the Company recorded the $1.4 million paid in advance for these 1,000 model S17-Pro miners as a deposit on the accompanying consolidated balance sheet.
Security Deposits2023.
During the year ended December 31, 2021, the Company paid approximately $3.1 million in connection with an amended and restated Transmission/Substation Facility Extension Agreement for the construction of the Oncor-owned Delivery System facilities to serve the expansion of the Whinstone Facility. The deposit can beRockdale Facility, all of which has been returned in two tranches: 1) upon verification by Oncor thatto the load demand meets or exceeds 394 MW, approximately $1.3 million can be returned, and 2) upon verification by Oncor that the load demand meets or exceeds 725 MW, the remaining $1.8 million can be returned. AsCompany as of December 31, 2021, the2023.
The Company has other security deposits totaling approximately $5.0$2.0 million for its offices and facilities, including $1.8 million associated with its ground lease of $1.8 million.lease.
Right of Use Assets
See Note 11, “Leases”.
Note 10.11. Accrued Expenses
The Company’s accrued expenses consist of the following:
| | | | | | |
|
| December 31, | | December 31, | ||
| | 2023 | | 2022 | ||
Construction in progress | | $ | 23,451 | | $ | 16,621 |
Power related costs and remittances | |
| 11,114 | |
| 32,632 |
Compensation | | | 14,888 | | | 8,582 |
Insurance | |
| 7,490 | |
| 3,660 |
Other | |
| 5,685 | |
| 3,969 |
Total accrued expenses | | $ | 62,628 | | $ | 65,464 |
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Note 12. Debt
Credit and security facility
The Company’s subsidiary, ESS Metron, has a Credit and Security Facility Agreement, as amended, which provides for a $10.0 million credit and security facility consisting of a $6.0 million revolving line of credit (the “Revolving Line of Credit”) and a $4.0 million equipment guidance line (the “Equipment Guidance Line”).
The Revolving Line of Credit has a term of two years with interest due monthly and principal due at maturity. All amounts borrowed under the Revolving Line of Credit carry a variable interest of not less than 4.0% and are secured by the assets of ESS Metron. As of December 31, 2023, the interest rate was 8.5%. Total borrowings under the Revolving Line of Credit during the year ended December 31, 2023, were $6.0 million and payments were $6.0 million. As of December 31, 2023, the outstanding balance on the Revolving Line of Credit was $0.
The Equipment Guidance Line has a term of two years and permits the Company to finance up to 80.0% of certain equipment purchases. All amounts borrowed under the Equipment Guidance Line carry a variable interest of not less than 4.0% and are secured by the assets of ESS Metron. As of December 31, 2023, the interest rate was 8.5%. Total borrowings under the Equipment Guidance Line during the year ended December 31, 2023, were approximately $0.9 million. During the year ended December 31, 2023, approximately $0.4 million outstanding under the Equipment Guidance Line converted to a fixed rate term loan (see below). As of December 31, 2023, the outstanding balance on the Equipment Guidance Line was approximately $0.5 million.
All borrowings and accrued interest under the equipment guidance line convert to fixed rate term loans every six months, which have either five-year terms for borrowings used to acquire vehicles and manufacturing equipment (“Manufacturing Term Loans”) or three-year terms for borrowings of equipment other than vehicles and manufacturing equipment (“Equipment Term Loans”). The Manufacturing Term Loans made upon the first conversion of guidance line loans carry interest at a fixed rate equal to the five-year treasury rate plus 2.5% as of conversion and the Equipment Term Loans made upon the first conversion of guidance line loans carry interest at a fixed rate equal to the three-year treasury rate plus 2.5% as of conversion. All subsequent conversions to Manufacturing Term Loans and Equipment Term Loans carry interest at a fluctuating rate equal to the lender’s prime rate.
During the year ended December 31, 2023, approximately $0.4 million outstanding under the Equipment Guidance Line was converted into a three-year Equipment Term Loan with a fixed interest rate of 6.6%. As of December 31, 2023, the outstanding balance on the Equipment Term Loan was approximately $0.3 million.
As of December 31, 20212023, the outstanding balance on the Equipment Guidance Line and 2020,Equipment Term Loans was recognized net of deferred financing costs of approximately $0.1 million. The net current outstanding debt balance of $0.3 million was recognized within Accrued Expenses and the Company’s accrued expenses consistednet long-term outstanding debt balance of $0.5 million was recognized within Other long-term liabilities on the Consolidated Balance Sheets.
As of December 31, 2023, the Company was in compliance with all covenants of the following (in thousands):Credit and Security Facility Agreement.
December 31, 2021 | December 31, 2020 | |||||||
Construction in progress | $ | 12,110 | $ | - | ||||
Payroll and payroll taxes | 5,741 | 415 | ||||||
Insurance | 2,507 | - | ||||||
Other | 1,713 | 1,167 | ||||||
Total accrued expenses | $ | 22,071 | $ | 1,582 |
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Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
Note 11.13. Leases
AtAs of December 31, 2021,2023, the Company had operating lease liabilities and right of use assetsleases primarily for its offices and the manufacturing facilities of ESS Metron, and a ground lease atfor the WhinstoneRockdale Facility, that expires in December 2030, inclusiveall of extension options the Company is reasonably certain will be exercised. At December 31, 2020, the Company did not have any significant operating lease balances.which expire on various dates through January 2032.
In November 2021, the Company entered into a lease termination agreement with the landlord of certain Whinstone abandoned leases for approximately $0.9 million. After eliminating the associated operating lease liabilities, we recognized other income of approximately $0.7 million duringDuring the year ended December 31, 2021.
Rental expense for lease payments related2022, the Company executed an amendment to the Company’s operating leases is recognized on a straight-line basis over the remainingground 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-termRockdale Facility to add a second 100-acre tract of land, adjacent to the land subject to the original ground lease, exception were insignificant.for an additional $0.9 million in annual payments. The term of the amended lease is scheduled to expire on January 31, 2032, followed by three ten-year renewal periods at the Company’s option, unless terminated earlier. Concurrent with the amendment to the ground lease, the Company extended the term of its Water Reservation Agreement for the Rockdale Facility (see Note 17. Commitments and Contingencies).
As of December 31, 20212023 and 2020, the2022, operating lease right of use assets were $13.2$20.4 million and zero,$21.7 million, respectively, and the operating lease liabilities were $13.4$21.3 million and zero, respectively, in the accompanying consolidated balance sheets related to our ground lease and office leases. Operating lease right$22.3 million, respectively.
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Table of use assets are included within long-term assets on the consolidated balance sheets.Contents
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.Riot Platforms, Inc.
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Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following table presents the components of the Company’s lease expense, which the ground and facilities’ leases are included in Cost of revenue and the office leases are included in Selling, general, and administrative on the Consolidated Statements of Operations:
(in thousands, except for share and per share amounts)
| | | | | | | | | |
|
| Years Ended December 31, | |||||||
| | 2023 |
| 2022 |
| 2021 | |||
Operating lease cost | | $ | 3,747 | | $ | 3,193 | | $ | 678 |
Variable lease cost | |
| 240 | |
| 182 | |
| 51 |
Operating lease expense | |
| 3,987 | |
| 3,375 | |
| 729 |
Short-term lease rent expense | |
| — | |
| — | |
| 19 |
Total lease expense | | $ | 3,987 | | $ | 3,375 | | $ | 748 |
The following summarizes quantitative information about the Company’s operating leases (dollars in thousands):
Years Ended December 31, | ||||||||||||
Lease cost | 2021 | 2020 | 2019 | |||||||||
Operating lease cost | $ | 678 | $ | 1,240 | $ | 2,378 | ||||||
Variable lease cost(1) | 51 | 1,040 | 3,200 | |||||||||
Operating lease expense | 729 | 2,280 | 5,578 | |||||||||
Short-term lease rent expense | 19 | 20 | 17 | |||||||||
Total rent expense | $ | 748 | $ | 2,300 | $ | 5,595 |
|
|
Other information | ||||||||||||
Operating cash flows from operating leases | $ | 435 | $ | 1,207 | $ | 2,377 | ||||||
Right of use assets exchanged for new operating lease liabilities | $ | 13,622 | $ | - | $ | 2,664 | ||||||
Weighted-average remaining lease term – operating leases | 8.6 | - | 0.5 | |||||||||
Weighted-average discount rate – operating leases | 5.8 | % | - | 10 | % |
F-36
Riot Blockchain, Inc. and Subsidiariestable presents supplemental lease information:
Notes to Consolidated Financial Statements
| | | | | | | | | | |
| | | | | | | | | | |
| | 2023 |
| 2022 |
| 2021 | | |||
Operating cash outflows for operating leases | | $ | 3,522 | | $ | 2,789 | | $ | 435 | |
Right of use assets exchanged for new operating lease liabilities | | $ | 1,249 | | $ | 10,333 | | $ | 13,622 | |
Weighted-average remaining lease term – operating leases | |
| 7.5 | |
| 8.5 | |
| 8.6 | |
Weighted-average discount rate – operating leases | |
| 6.7 | % |
| 6.6 | % |
| 5.8 | % |
(in thousands, except for share and per share amounts)
The following table represents our future minimum operating lease payments as of and subsequent to, December 31, 2021 under ASC 842 (in thousands):2023:
Ground lease | Office and other leases | Total | ||||||||||||||||||
2022 | $ | 942 | $ | 990 | $ | 1,932 | ||||||||||||||
2023 | 970 | 1,012 | 1,982 | |||||||||||||||||
| | | | | | | | | | |||||||||||
|
| Ground lease |
| Office and other leases |
| Total | ||||||||||||||
2024 | 999 | 1,001 | 2,000 | | $ | 1,998 | | $ | 1,798 | | $ | 3,796 | ||||||||
2025 | 1,029 | 908 | 1,937 | |
| 2,058 | |
| 1,495 | |
| 3,553 | ||||||||
2026 | 1,060 | 823 | 1,883 | | | 2,119 | | | 1,425 | | | 3,544 | ||||||||
2027 | |
| 2,183 | |
| 1,305 | |
| 3,488 | |||||||||||
2028 | |
| 2,249 | |
| 1,017 | |
| 3,266 | |||||||||||
Thereafter | 3,374 | 4,060 | 7,434 | |
| 7,369 | |
| 2,426 | |
| 9,795 | ||||||||
Total undiscounted lease payments | 8,374 | 8,794 | 17,168 | |
| 17,976 | |
| 9,466 | |
| 27,442 | ||||||||
Less present value discount | (2,164 | ) | (1,565 | ) | (3,729 | ) | |
| (4,685) | |
| (1,412) | |
| (6,097) | |||||
Present value of lease liabilities | $ | 6,210 | $ | 7,229 | $ | 13,439 | | $ | 13,291 | | $ | 8,054 | | $ | 21,345 |
Note 12.14. Stockholders’ Equity
Preferred Stock
0% Series B Convertible Preferred Stock
On November 3, 2017, the Company designated 1,750,001 shares of preferred stock as “0% Series B Convertible Preferred Stock” pursuant to the Certificate of Designation filed with the Secretary of State of the State of Nevada.Stock.”
The shares of 0% Series B Convertible Preferred Stock are non-voting and convertible into shares of common stock based on a conversion calculation equal to the stated value of the 0% Series B Convertible Preferred Stock, plus all accrued and unpaid dividends, if any, on such 0% Series B Convertible Preferred Stock, as of such date of determination, divided by the conversion price. The stated value of each share of 0% Series B Convertible Preferred Stock is $6.80 and the initial conversion price is $6.80 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. The holders of 0% Series B Convertible Preferred Stock are entitled to receive dividends if and when declared by the Company’s board of directors. The 0% Series B Convertible Preferred Stock is also subject to beneficial ownership limitations and conversion limitations, as further described in the documents.limitations.
During the year ended December 31, 2021, 2,000 shares of the Company’s 0% Series B Convertible Preferred Stock were converted into 2,000 shares of its common stock, leaving 2,199 shares outstanding. As of December 31, 2021 and 2020, 2,199 and 4,199 shares of the Company’s 0% Series B Convertible Preferred Stock were outstanding, respectively.
Subsequent to December 31, 2021,2022, the remaining 2,199 shares outstanding of the Company’s 0% Series B Convertible Preferred Stock were converted to 2,199 shares of its common stock andstock. As of December 31, 2023, no shares of the Company’s 0% Series B Convertible Preferred Stock are currentlywere outstanding.
Common Stock:Stock
The Company is authorized to issue up to 340,000,000 shares of Common Stock, without any par value per share.
F-31
Each holder of Common Stock is entitled to one vote for each share held of record on all matters to be voted on by such holders. Holders of Common Stock are entitled to receive dividends, if declared. Upon liquidation, dissolution or winding-up, holders of Common Stock are entitled to share ratably in the net assets legally available for distribution after payment of all debts and other liabilities, subject to any preferential rights of the holders of Preferred Stock, if any.
ATM Equity Offerings
2023 ATM Offering
At-the-Market Equity Offerings
2021In August 2023, the Company entered into the 2023 ATM Offering, under which it could offer and sell up to $750.0 million in shares of the Company’s common stock.
During the year ended December 31, 2023, the Company received net proceeds of approximately $571.6 million ($583.3 million of gross proceeds, net of $11.7 million in commissions and expenses) from the sale of 45,758,400 shares of its common stock at a weighted average fair value of $13.07 per share under its 2023 ATM Offering.
Subsequent to December 31, 2023, and through February 20, 2024, the Company received net proceeds of approximately $114.9 million from the sale of 8,644,100 shares of its common stock at a weighted average fair value of $13.57 per share under its 2023 ATM Offering.
2022 ATM Offering
For
In March 2022, the period August 31, 2021Company entered into an ATM sales agreement under which it could offer and sell up to $500.0 million in shares of the Company’s common stock.
During the year ended December 31, 2021, in connection with the At-the-Market Sales Agreement between the Company and its sales agent, Cantor Fitzgerald & Co., B. Riley FBR, Inc., BTIG, LLC, Compass Point Research & Trading, LLC and Roth Capital Partners, LLC (the “Sales Agents”)2022, the Company received gross proceeds of approximately $600$304.8 million ($298.2 million, net of $6.6 million in commissions and expenses), from the sale of 37,052,612 shares of common stock at an average fair value of $8.23 per share under the 2022 ATM Offering.
During the year ended December 31, 2023, the Company received net proceeds of approximately $191.2 million ($195.2 million of gross proceeds, net of $3.9 million in commissions and expenses) from the sale of 16,447,645 shares of its common stock at a weighted average fair value of $11.86 per share under its 2022 ATM Offering. With the sale and issuance of these shares, all $500.0 million in shares of the Company’s common stock available for sale under its 2022 ATM Offering had been issued.
2021 ATM Offering
In August 2021, the Company entered into an ATM sales agreement under which it could offer and sell up to $600.0 million in shares of the Company’s common stock.
During the year ended December 31, 2021, the Company received gross proceeds of approximately $600.0 million ($587.2 million, net of $12.8 million in commissions and expenses), from the sale of 19,910,589 shares of common stock with anat a weighted average fair value of $29.53 per share, in the 2021 ATM Offering.share. With the sale and issuance of these shares, all $600$600.0 million in shares of the Company’s common stock registeredavailable for sale under the December 2021 Registration StatementATM Offering had been issued and the Company completed the 2021 ATM Offering.
F-37
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)issued.
2020 ATM Offering
As ofIn October 15, 2020, the Company and H.C. Wainwright entered into the first amendment to the Sales Agreement (the “First Amendment to the Sales Agreement”). Pursuant to the First Amendment to the Sales Agreement, the Company sold, through H.C. Wainwright as itsan ATM sales agent,agreement under which it received proceeds of approximately $100.0 million in sharesfrom the sale of the Company’s common stock from time to time in an at-the-market offering (the “October 2020 ATM Offering”). According to the First Amendment to the Sales Agreement, theshares. The Company paid H.C. Wainwright a commissionincurred fees of up to 3.0% of the aggregate gross proceeds the Company receives from all sales of its common stock in the October 2020 ATM Offering.received.
All Sales of shares of the Company’s common stock, no par value in the October 2020 ATM Offering were made pursuant to the prospectus and prospectus supplement filed with and forming a part of the Company’s shelf registration statement on Form S-3 (Registration No. 333-249356), filed with the SEC on October 7, 2020 and declared effective as of October 15, 2020 (the “October 2020 Registration Statement”). Under the terms of the October 2020 ATM Offering, the Company only issued shares of its common stock. The Company did not issue any other securities, including but not limited to, options to purchase shares of the Company’s common stock and common stock warrants, under the October 2020 ATM Offering.
Effective December 12, 2020, the Company and H.C. Wainwright entered into the second amendment to the Sales Agreement (the “Second Amendment to the Sales Agreement”). Pursuant to the Second Amendment to the Sales Agreement, the Company has sold, through H.C. Wainwright as its sales agent, up to $200.0 million in shares of the Company’s common stock from time to time in an at-the-market offering (the “December 2020 ATM Offering”). Pursuant to the Second Amendment to the Sales Agreement, the Company paid H.C. Wainwright a commission of up to 3.0% of the aggregate gross proceeds the Company received from all sales of its common stock in the December 2020 ATM Offering.
DuringIn January 2021, in connection with the Second Amendment to the At-the-Market Sales Agreement between the Company and its sales agent, H.C. Wainwright, the Company received gross proceeds of approximately $84.8 million ($82.7 million net, ofafter $2.1 million in expenses) from the sale of 4,433,468 shares of common stock withat an average fair value of $19.13 per share under an ATM agreement entered into in the December 2020 ATM Offering.2020. With the sale and issuance of these shares, all $200 million in shares of the Company’sCompany common stock registeredavailable for sale under the December 2020 Registration StatementATM Offering had been issued and the Company completed the December 2020 ATM Offering.
2019 ATM Offering
The Company entered into an At-The-Market Sales Agreement with H.C. Wainwright & Co., LLC (“H.C. Wainwright”), dated as of May 24, 2019 (the “Sales Agreement”), relating to the sale by the Company through H.C. Wainwright as its sales agent, of up to $100.0 million in shares of the Company’s common stock from time to time in an at-the-market offering (“2019 ATM Offering”). All sales of the Company’s common stock in the 2019 ATM Offering were made pursuant to the prospectus and prospectus supplement forming a part of the Company’s shelf registration statement on Form S-3, as amended (Registration No. 333-226111), which was declared effective as of May 8, 2019 (the “2019 Registration Statement”).
Effective as of October 15, 2020, as part of the First Amendment to the Sales Agreement discussed below, the Company and H.C. Wainwright terminated the 2019 ATM Offering. As of its termination, the Company had cumulatively sold 30.6 million shares of its common stock, for an aggregate gross sales price of approximately $74 million pursuant to the 2019 ATM Offering. With the termination of the 2019 ATM Offering, no additional securities will be sold by the Company pursuant to the prospectus supplement relating to the 2019 Registration Statement.issued.
Under the terms of the 2019,2023, 2022, 2021, and 2020 and 2021 ATM Offerings, the Company only issued shares of its common stock.
F-38F-32
Riot Blockchain,Platforms, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
ESS Metron Holdback Shares
(On December 1, 2021, the Company acquired 100% of the equity interests in thousands, exceptESS Metron for shareconsideration that included 715,413 shares of the Company’s common stock, 70,165 shares of which were withheld as security for the sellers’ indemnification obligations for 18 months. During the year ended December 31, 2023, the indemnification period ended and all 70,165 of the withheld shares were issued to the ESS Metron sellers.
Warrants
During the year ended December 31, 2021, the Company issued warrants to XMS Capital Partners, LLC as partial payment for its advisory services in connection with the Whinstone Acquisition. The warrants entitle XMS to purchase up to 63,000 shares of the Company’s common stock at a purchase price of $48.37 per share amounts)share. The warrants may be exercised at any time through August 12, 2026.
The warrants are recognized as a liability with a fair value of zero upon issuance and a redemption value of zero as of December 31, 2023.
2023 Transactions
During the year ended December 31, 2023, approximately 5.0 million shares of common stock were issued to the Company’s board of directors, officers, employees, and advisors in settlement of an equal number of fully vested restricted stock awards awarded to such individuals by the Company under the 2019 Equity Incentive Plan. The Company withheld approximately 1.3 million of these shares, with a fair value of approximately $14.0 million, to cover the withholding taxes related to the settlement of these vested restricted stock awards, as permitted by the 2019 Equity Incentive Plan.
In June 2023, the Company’s stockholders approved the Fourth Amendment to the 2019 Equity Incentive Plan, which increased the shares of common stock reserved for issuance under the 2019 Equity Incentive Plan by 4.0 million shares.
In December 2023, the Company’s stockholders approved the Fifth Amendment to the 2019 Equity Incentive Plan, which increased the shares of common stock reserved for issuance under the 2019 Equity Inventive Plan by 13.0 million shares.
2022 Transactions
During the year ended December 31, 2022, the Company increased its authorized shares of common stock from 170.0 million shares to 340.0 million shares.
During the year ended December 31, 2022, 1,819,332 shares of common stock were issued to the Company’s board of directors, officers, employees, and advisors of the Company in settlement of an equal number of fully vested restricted stock units awarded to such individuals by the Company under the 2019 Equity Incentive Plan. The Company withheld 685,781 of these shares, at a fair value of approximately $10.1 million, to cover the withholding taxes related to the settlement of these vested restricted stock units, as permitted by the 2019 Equity Incentive Plan.
During the year ended December 31, 2022, — shares of the Company’s 0% Series B Convertible Preferred Stock were converted into 70,165 shares of its common stock, leaving no shares outstanding.
In July 2022, the Company’s stockholders approved the Third Amendment to its 2019 Equity Incentive Plan, which increased the number of shares of the Company’s common stock reserved for issuance by 10.0 million shares.
2021 Transactions
During the year ended December 31, 2021, the Company issued 11,800,000 shares of its common stock in connection with its acquisition of Whinstone. See Note 4, “Acquisitions”3. Acquisitions.
During the year ended December 31, 2021, the Company issued 645,248 shares of its common stock in connection with its acquisition of ESS Metron. See Note 4, “Acquisitions”3. Acquisitions.
F-33
During the year ended December 31, 2021, 464,021 shares of common stock were issued to the Company’s board of directors, officers, employees and advisors of the Company 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 Incentive Plan, as amended (the “2019 Equity Plan”).amended. The Company withheld 174,685 of these shares, at a fair value of approximately $5.1 million, to cover the withholding taxes related to the settlement of these vested restricted stock units, as permitted by the 2019 Equity Incentive Plan.
During the year ended December 31, 2021, the Company issued 415,657 shares of its common stock in connection with the exercise of 415,657 common stock warrants issued to investors in connection with the Company’s January 2019 private placement transaction, for net proceeds of approximately $0.8 million.
During the year ended December 31, 2021, the Company issued 543,686 shares of its common stock in connection with the cashless exercise of warrants to purchase 1,257,235 shares of common stock, which were issued to investors in connection with private placement transactions in December 2017.
During the year ended December 31, 2021, the Company issued 10,286 shares of its common stock upon the cashless exercise of 12,000 stock options.
During the year ended December 31, 2021, 2,000 shares of the Company’s 0% Series B Convertible Preferred Stock were converted into 2,000 shares of its common stock, leaving 2,199 shares outstanding. The Company currently has one equity compensation plan, The Riot Blockchain, Inc.the 2019 Equity Incentive Plan, as amended (the “2019 Plan”).Plan. On October 19, 2021, the Company’s shareholdersstockholders approved the second amendmentSecond Amendment to its 2019 Equity Incentive Plan, which increased the number of shares of the Company’s common stock reserved for issuance by 4,400,000 shares.
4.4 million shares2020 Transactions.
DuringNote 15. Stock-Based Compensation
The 2019 Equity Incentive Plan authorizes the year ended December 31, 2020,granting of stock-based compensation awards to directors, officers, employees, and advisors of the Company received net proceeds underin the Sales Agreement, as amended with H.C. Wainwrightform of approximately $257.5 million (after deducting $7.3 millionrestricted stock awards (“RSAs”), restricted stock units (“RSUs”), or stock options, all of which settle in commissions and expenses), at a weighted average gross sales price of $5.30 per share, from sales of 49,932,051 shares of its common stock.
During the year ended December 31, 2020, the 200,000 shares ofCompany’s common stock held in escrow under the Escrow Deposit Agreement were voided and cancelled.
During the year ended December 31, 2020, 122,377upon vesting. 3.6 million shares of common stock were issued toinitially reserved for issuance.
In July 2023, the Company adopted a Company executivenew long-term incentive program under an employment agreement in settlement of $175,000 of previously accrued compensation under the Company’sits 2019 Riot Blockchain, Inc. Equity Incentive Plan, (the “Equity Plan”),under which employees are eligible to receive performance-based RSAs or RSUs and 5,000 shares of common stock were issued in settlement of fully vested restricted stock rights previously granted and previously expensed underservice-based RSAs or RSUs. The performance-based awards are eligible to vest based on the Company’s former 2017 Equity Incentive Plan.
During the year ended December 31, 2020, 2,048,096 shares of common stock were issued to the Company’s board of directors, officers and employees of the Company 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 193,881 of these shares at a fair value of approximately $0.45 million, to cover the withholding taxes related to the settlement of these vested restricted stock units. The settlement of the fully vested restricted stock units included the accelerated vesting of 471,544 restricted stock units due to the resignation of a memberrelative performance of the Company’s Board,common stock (“Total Stockholder Return” or “TSR”), compared to the performance of the Russell 3000 Index (the “Index TSR”), during the three-year performance period commencing as permitted underof the 2019 Equity Plan.grant date of the TSR award (collectively, the “TSR Awards”). The TSR Awards have a vesting range of 0% to 200% of the recipient’s target award, which is calculated based on the difference between the Company’s TSR and the Index TSR over the three-year performance period, subject to the recipient’s continuous employment with the Company through the third anniversary of the award’s grant date. The service-based awards are eligible to vest in one-third annual installments over a three-year service period commencing on the award’s grant date, subject to the recipient’s continuous employment with the Company through the applicable vesting dates.
During the year ended December 31,In November 2020, the Company issued 40,634 shares of its common stock to a consultant and advisors in settlement of fully vested restricted stock units granted under the 2019 Equity Plan.
During the year ended December 31, 2020, the Company issued 1,492,487 shares of its common stock related to the exercise of 1,492,487 common stock warrants granted to the Investors in the January 2019 Private Financing for cash of approximately $2.9 million or $1.94 per share.
F-39
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
Note 13. Restricted Common Stock, Stock Options, Restricted Stock Units (“RSUs”) and Warrants
The Company provides stock-based compensation to directors, employees and consultants under the 2019 Equity Plan, which was approved by shareholders on October 23, 2019 at the 2019 Annual Meeting of Shareholders. On November 12, 2020 at the 2020 Annual Meeting of Shareholders, the shareholdersCompany’s stockholders approved the First Amendment to the 2019 Equity Incentive Plan, which raisedincreased the total number of shares of the Company’s common stock to 4,061,809 shares. On October 19, 2021, the Company’s shareholders approved the second amendment to its 2019 Equity Plan, which increases the number of shares of the Company’s common stock reserved for issuance by 4,400,0003.5 million shares. The
In October 2021, the Company’s stockholders approved the Second Amendment to the 2019 Equity Inventive Plan, which increased the shares of common stock reserved for issuance by 4.4 million shares.
In July 2022, the Company’s stockholders approved the Third Amendment to the 2019 Equity Incentive Plan, which increased the shares of common stock reserved for issuance by 10.0 million shares.
In June 2023, the Company’s stockholders approved the Fourth Amendment to the 2019 Equity Incentive Plan, which increased the shares of common stock reserved for issuance by 4.0 million shares.
In December 2023, the Company’s stockholders approved the Fifth Amendment to the 2019 Equity Incentive Plan, which increased the shares of common stock reserved for issuance by 13.0 million shares.
F-34
As of December 31, 2023, the Company also provides stock-based compensation to employees, directors and consultants, with non-qualified options and warrants issued outsidehad 18,517,831 shares of the Plan. The Company hascommon stock reserved 3,554,111 common shares for issuance under the 2019 Equity Incentive Plan.
Stock-based Compensation
The Company’s stock-based compensation expenses recognized during the years ended December 31, 2021, 2020 and 2019, were attributable to selling, general and administrative expenses, which are included in the accompanying consolidated statements of operations.
The Company recognized totalfollowing table presents stock-based compensation expense by category:
| | | | | | | | | |
| | Years Ended December 31, | |||||||
|
| 2023 |
| 2022 |
| 2021 | |||
Performance-based stock awards and units | | $ | (4,703) | | $ | 16,444 | | $ | 63,556 |
Service-based stock awards and units | | | 36,873 | | | 8,111 | | | 4,935 |
Total stock-based compensation | | $ | 32,170 | | $ | 24,555 | | $ | 68,491 |
Stock-based compensation expense is recognized within Selling, general and administrative on the Consolidated Statements of Operations.
Performance-Based Awards and Units
Performance-based awards and units are eligible to vest either: (i) over a three-year performance period ending December 31, 2023, based upon financial performance targets met during the years endedperformance period, and the completion of specified performance milestones related to development and monetization of added infrastructure capacity; or (ii) based on the Company’s TSR as compared to the Index TSR through December 31, 2021, 2020 and 2019, from2025.
The following table presents a summary of the following categories:activity of the performance-based RSAs:
Years Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Time-based restricted stock awards | $ | 4,935 | $ | 3,407 | $ | 687 | ||||||
Performance-based restricted stock awards | 63,556 | - | - | |||||||||
Stock option awards | - | - | 58 | |||||||||
Total stock-based compensation | $ | 68,491 | $ | 3,407 | $ | 745 |
| | | | | |
| | | | Weighted Average | |
| | | | Grant-Date | |
| | | | Per Share | |
|
| Number of Shares |
| Fair Value | |
Balance as of January 1, 2023 | | 3,918,935 | | $ | 25.92 |
Granted | | 2,076,340 | | $ | 17.48 |
Vested | | (567,281) | | $ | 24.96 |
Forfeited | | (499,468) | | $ | 33.54 |
Balance as of December 31, 2023 | | 4,928,526 | | $ | 21.71 |
Restricted Common Stock Awards
During the year ended December 31, 2021,2022, the Company granted 245,266 performance-based and time-based restricted stock units (RSUs) to its directors, employees and advisors.
Performance-based RSUs
On August 12, 2021, the Compensation Committee of the Board of Directors of the Company approvedRSAs with a new performance-based restricted stock unit performance plan (the “Performance RSU Plan”) for all executive officers and eligible employees of the Company and its consolidated subsidiaries. In connection with the Performance RSU Plan, the Compensation Committee approved a form of performance-based restricted stock unit award agreement under the 2019 Equity Plan in relation to granting Performance RSUs. The Performance RSUs vest upon the successful completion of specified milestones related to added infrastructure capacity and also adjusted Earnings Before Income Taxes, Depreciation and Amortization (“EBITDA”) targets over a three-year performance period beginning in 2021 and ending on December 31, 2023. Thegrant date fair value of the RSUs awarded is established as the fair market value of the Company’s common stock at the time of the grant. The Company recognizes compensation cost when achievement of the milestones and targets are probable, and recognizes the cost over the performance period. The Performance RSUs are settled in shares of the Company’s common stock upon vesting.
F-40
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
A summary of the Company’s unvested performance-based restricted common stock activity in the year ended December 31, 2021 is presented here:
Number of Shares | Weighted Average Grant-Date Fair Value | ||||||||
Unvested at January 1, 2021 | - | $ | - |
| |||||
Granted | 4,033,159 | $ | 36.69 |
| |||||
Vested | (393,574 | ) | $ | 36.67 | |||||
Forfeited | (235,000 | ) | $ | 36.83 |
| ||||
Unvested at December 31, 2021 | 3,404,585 | $ | 36.68 |
|
$1.7 million. During the year ended December 31, 2021, the Company awarded 4,033,159no performance-based restricted shares of common stock under the 2019 Equity Plan to employees, which are generally eligible to vest upon the successful completion of specified milestones related to added infrastructure capacity and also adjusted EBITDA targets over a three-year performance period beginning in 2021 and ending on December 31, 2023.RSAs were awarded.
As of December 31, 2021, a total of 393,574 Performance RSU Awards for officers and employees were determined by the Compensation Committee to have vested for the successful completion of specified milestones.
The value of performance-based restricted common stock grants is measured based on their fair market value on the date of grant and amortized over their respective estimated implicit service periods. During the year ended December 31, 2021, the fair value of awards granted totaled $148.0 million and as of December 31, 2021,2023, there was approximately $47.5$27.8 million of total unrecognized compensation cost related to restricted common stock awards,the performance-based RSAs, which is expected to be recognized over a remaining weighted-average vesting period of approximately 5 months.2.6 years.
There were no performance-based restricted stock awards granted during the years ended December 31, 2020 and 2019.
Time-based RSUs
AThe following table presents a summary of the Company’s unvested time-based restricted common stock activity inof the performance-based RSUs:
| | | | | |
| | | | Weighted Average | |
| | | | Grant-Date | |
| | | | Per Share | |
|
| Number of Shares |
| Fair Value | |
Balance as of January 1, 2023 | | — | | $ | — |
Granted | | 246,426 | | $ | 19.59 |
Vested | | — | | $ | — |
Forfeited | | — | | $ | — |
Balance as of December 31, 2023 | | 246,426 | | $ | 19.59 |
During the year ended December 31, 2021 is as follows:
Number of Shares | Weighted Average Grant-Date Fair Value | ||||||||
Unvested at December 31, 2020 | 633,305 | $ | 1.27 |
| |||||
Vested | (232,283 | ) | $ | 17.94 |
| ||||
Granted | 212,189 | $ | 33.33 | ||||||
Forfeited | (2,650 | ) | $ | 34.08 |
| ||||
Unvested at December 31, 2021 | 610,561 | $ | 5.93 |
|
2022, the Company granted 1,412,299 performance-based RSUs with a grant date fair value of $15.1 million. During the year ended December 31, 2021, the Company awarded 212,189 restricted shares of time-based common stock under the 2019 Equity Plan to directors, employees and advisors,granted 4,033,159 performance-based RSUs with a grant date fair value of $7.1 million, which are generally eligible to vest over a one-year period.$148.0 million. During the year ended December 31, 2020, the Company awarded 1,544,359 restricted shares of time-based common stock with a fair value of $2.0 million, and during the year ended December 31, 2019, the Company awarded 1,542,332 restricted shares of time-based common stock with a fair value of $2.2 million.2022, all outstanding performance-based RSUs were converted into performance-based RSAs.
The value of time-based restricted common stock grants is measured based on their fair market value on the date of grant and amortized over their respective vesting periods. As of December 31, 2021,2023, there was approximately $2.3$4.1 million of unrecognized compensation cost related to unvested restricted common stock rights,the performance-based RSUs, which is expected to be recognized over a remaining weighted-average vesting period of approximately 3 months.2.6 years.
F-41F-35
Riot Blockchain,Platforms, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Service-Based Awards and Units
Service-based awards vest over a one, two, and three-year service periods.
(in thousands, except for share and per share amounts)The following table presents a summary of the activity of the service-based RSAs:
Stock Incentive Plan Options
| | | | | |
| | | | Weighted Average | |
| | | | Grant-Date | |
| | | | Per Share | |
|
| Number of Shares |
| Fair Value | |
Balance as of January 1, 2023 | | 8,855,744 | | $ | 6.84 |
Granted | | 1,313,925 | | $ | 15.44 |
Vested | | (4,464,307) | | $ | 6.89 |
Forfeited | | (807,468) | | $ | 6.86 |
Balance as of December 31, 2023 |
| 4,897,894 | | $ | 9.14 |
TheDuring the year ended December 31, 2022, the Company estimates theawarded 10,310,115 service-based RSAs with a grant date fair value of $69.4 million. During the share-based option awards onyear ended December 31, 2021, no service-based RSAs were awarded.
As of December 31, 2023, there was approximately $29.0 million of unrecognized compensation cost related to the dateservice-based RSAs, which is expected to be recognized over a remaining weighted-average vesting period of grant using the Black-Scholes option-pricing model (the “Black-Scholes model”)approximately 10 months. Using the Black-Scholes model, the value
The following table presents a summary of the award that is ultimately expected to vest is recognized over the requisite service period in the statement of operations. The Company attributes compensation to expense using the straight-line single option method for all options granted.
The Company’s determinationactivity of the estimatedservice-based RSUs:
| | | | | |
| | | | Weighted Average | |
| | | | Grant-Date | |
| | | | Per Share | |
|
| Number of Shares |
| Fair Value | |
Balance as of January 1, 2023 | | — | | $ | — |
Granted | | 155,213 | | $ | 19.30 |
Vested | | — | | $ | — |
Forfeited | | — | | $ | — |
Balance as of December 31, 2023 |
| 155,213 | | $ | 19.30 |
During the year ended December 31, 2022, the Company awarded 922,552 service-based RSUs with a grant date fair value of share-based payment awards on the date of grant under the Plan is affected by the following variables and assumptions:
•
The grant date exercise price – the closing market price of the Company’s common stock on the date of the grant;
•
Expected option term – based on historical experience with existing option holders estimated at 3-5 years;
•
Estimated dividend rates – based on historical and anticipated dividends over the life of the option;
•
Legal term of the option – grants have legal lives of 10 years;
•
Risk-free interest rates – with maturities that approximate the expected life of the options granted;
•
Calculated stock price volatility – calculated over the expected life of the options granted, which is calculated based on the daily closing price of the Company’s common stock over the period commencing in mid-2017 when the Company changed its strategic focus; and
•
Option exercise behaviors – based on actual and projected employee stock option exercises and forfeitures.
•
The Company accounts for forfeitures as they occur.
The Company currently provides stock-based compensation to employees, directors and consultants under the Plan.$6.4 million. During the year ended December 31, 2021, the Company issued 10,286 sharesgranted 212,189 service-based RSUs with a grant date fair value of its common stock for the exercise of 12,000 stock options. There were no stock options granted during the years ended December 31, 2021, 2020 and 2019, and as of December 31, 2021, there are no stock options outstanding.
Other common stock purchase warrants
$7.1 million. During the year ended December 31, 2021, 63,000 warrants2022, all outstanding service-based RSUs were issuedconverted into service-based RSAs.
As of December 31, 2023, there was approximately $2.6 million of unrecognized compensation cost related to XMS as partial payment for its advisory services in connection with the Whinstone Acquisition. The warrant entitles XMSservice-based RSUs, which is expected to purchase frombe recognized over a remaining weighted-average vesting period of approximately 2.2 years.
Subsequent Awards
In January 2024, the Company upawarded 1,000,000 performance-based RSUs with a grant date fair value of approximately $14.1 million, 14,071,926 performance-based RSAs with a grant date fair value of approximately $199.5 million, and 38,707 service-based RSAs with a grant date fair value of approximately $0.6 million and a three-year service period. The performance-based awards are eligible to 63,000 shares ofvest based on the Company’s common stock, no par value per share, at a purchase priceTSR as compared to the Index TSR through December 31, 2025.
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F-42
Riot Blockchain,Platforms, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
The following is a summary of outstanding warrants for the year ended December 31, 2021:
Shares Underlying Options/Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | ||||||||||||||
Outstanding and exercisable at December 31, 2020 | 2,061,770 | $ | 32.33 | 1.1 | $ | 6,256 |
| ||||||||||
Granted | 63,000 | $ | 48.37 | 4.9 | - |
| |||||||||||
Exercised | (1,672,892 | ) | $ | 1.94 | - | - |
| ||||||||||
Forfeited | (388,878 | ) | $ | 40.00 | - | - |
| ||||||||||
Outstanding and exercisable at December 31, 2021 | 63,000 | $ | 48.37 | 4.6 | $ | - |
|
The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the Company’s closing stock price on December 31, 2021 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders, had all option holders been able to, and in fact had, exercised their options on December 31, 2021.
There were no warrants granted during the years ended December 31, 2020 and 2019.
Note 14.16. Fair Value Measurements
Assets and liabilities measured at fair value on a recurring basis
The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis consisted of the following as of the Whinstone Acquisition Date of May 26, 2021, and December 31, 2021:basis:
Fair value measured at May 26, 2021 | ||||||||||||||||
Total carrying value at May 26, 2021 | Quoted prices in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||
Derivative asset | $ | 13,967 | $ | - | $ | - | $ | 13,967 | ||||||||
Contingent consideration liability | $ | 82,953 | $ | - | $ | - | $ | 82,953 |
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 |
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| | | | | | | | | | | | |
| | Fair value measured as of December 31, 2023 | ||||||||||
| | | | | | | | | | | Significant | |
| | | | | Quoted prices in | | Significant other | | unobservable | |||
| | Total carrying | | active markets | | observable inputs | | inputs | ||||
|
| Value |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
Bitcoin (a) | | $ | 311,178 | | $ | 311,178 | | $ | — | | $ | — |
Convertible note (b) | | $ | 4,709 | | $ | — | | $ | — | | $ | 4,709 |
Derivative asset (c) | | $ | 104,218 | | $ | — | | $ | — | | $ | 104,218 |
Contingent consideration liability (d) | | $ | 909 | | $ | — | | $ | — | | $ | 909 |
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| | | | | | | | | | | | |
| | Fair value measured as of December 31, 2022 | ||||||||||
| | | | | | | | | | | Significant | |
| | | | | Quoted prices in | | Significant other | | unobservable | |||
| | Total carrying | | active markets | | observable inputs | | inputs | ||||
|
| Value |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
Derivative asset (b) | | $ | 97,497 | | $ | — | | $ | — | | $ | 97,497 |
Contingent consideration liability (c) | | $ | 24,935 | | $ | — | | $ | — | | $ | 24,935 |
(in thousands, except for share and per share amounts)
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. 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 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 December 2030. The discount rate utilized of approximately 21% includes observable market inputs, but also includes unobservable inputs based on qualitative judgment related to company-specific risk factors.
The terms of the Power Supply Agreement require margin-based collateral, calculated as exposure resulting from fluctuations in the market cost rate of electricity versus the fixed price stated in the contract. The margin-based collateral requirement to the Company is zero as of December 31, 2021.
Level 3 Liabilities
Business Combination Contingent Consideration
The Company recorded a Level 3 financial liability during the year ended December 31, 2021, relating to the contingent consideration arrangement arising from the acquisition of Whinstone. Contingent consideration represents an obligation of the Company to transfer cash to the Seller when Whinstone realizes or receives a benefit from utilization of certain defined power credits. See Note 4, “Acquisitions”. 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.
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(a) | See Note 5. Bitcoin |
(b) | See Note 6. Investments |
(c) | See Note 9. Power Purchase Agreement |
(d) | See Note 17. Commitments and Contingencies |
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
The following table presents the changes in the estimated fair value of the derivative asset measured using significant unobservable inputs (Level 3) for the year ended December 31, 2021 (in thousands):
Derivative Asset | ||||
Balance as of January 1, 2021 | $ | - | ||
Acquisition of Whinstone | 13,967 | |||
Change in fair value | 12,112 | |||
Balance as of December 31, 2021 | $ | 26,079 |
For the year ended December 31, 2021 there was a change of approximately $12.1 million in Level 3 assets measured at fair value. Additionally, during the year ended December 31, 2021, power sales back to ERCOT through its demand response programs of $6.5 million were recorded in change in fair value of derivative asset in the consolidated statements of operations. There were no Level 3 assets for the year ended December 31, 2020.
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 year ended December 31, 2021 (in thousands):
Contingent Consideration Liability | ||||
Balance as of January 1, 2021 | $ | - | ||
Acquisition of Whinstone | 82,953 | |||
Change in fair value | 975 | |||
Balance as of December 31, 2021 | $ | 83,928 |
For the year ended December 31, 2021 the change in Level 3 liabilities measured at fair value was approximately $1.0 million. There were no Level 3 liabilities for the year ended December 31, 2020. Our 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 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 periodperiods presented.
Assets and Liabilities Not Measuredliabilities not measured at Fair Valuefair value on a Recurring Basisrecurring basis
In addition to assets and liabilities that are measured at fair value on a recurring basis, we also measure certain assets and liabilities at fair value on a nonrecurring basis. Our non-financial assets, including goodwill, intangible assets, operating lease right of use assets, and property, plant and equipment, are measured at fair value when there is an indication of impairment and the carrying amount exceeds the asset’s projected undiscounted cash flows. These assets are recorded at fair value only when an impairment charge is recognized.
As of December 31, 2023 and 2022, the fair values of cash and cash equivalents, accounts receivable, contract assets, prepaid expenses and other current assets, accounts payable, contract liabilities, and accrued expenses approximated their carrying values because of their short-term nature.
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Note 15.17. Commitments and Contingencies
Commitments
Miners and mining equipment
During the year ended December 31, 2023, the Company paid $191.1 million in deposits and payments to MicroBT for the purchase of miners pursuant to the Master Agreement described herein. The remaining commitment of approximately $270.4 million is due in installments through approximately April 2025 based on the estimated miner delivery schedule. Total payments of $220.0 million and $50.4 million are expected to be made in 2024 and 2025, respectively.
During the year ended December 31, 2023, the Company paid $31.2 million in deposits and payments to Midas for the purchase of immersion cooling systems described herein. The remaining commitment of approximately $21.1 million is due in installments in early 2024, based on the estimated delivery schedule.
Operating Leasesleases
The Company leases its primary office locations and data center hosting facilities, as well ashas a ground lease for its Rockdale Facility under noncancelable lease agreements that expire on varying dates through 2030. See2032. For additional information see Note 11, “Leases”13. Leases.
F-45
Riot Blockchain, Inc. and SubsidiariesWater reservation agreement
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
Water Reservation Agreement
Whinstone executedThe Company has a water reservation agreement, in April 2021as amended, with the lessor of theits ground lease to obtainsecure a certain quantity of non-potable water from a nearby lake to be used by the Company for commercial purposes. We use theat its Rockdale Facility. The water for evaporative cooling in our data center facility. The initial term of thereservation agreement runs through December 2027January 2032 and requires annual payments of approximately $1.0$2.2 million.
The Company concluded that the water reservation agreement was not a lease or a derivative instrument. Because the Company obtained an additional right of use for the reserved water amount, and the charges were increased by a standalone price commensurate with the additional water use rights and at market rates, the water reservation agreement was determined to be a lease modification accounted for as a separate contract. As such, the fees of the water reservation agreement were excluded from the lease payments of the ground lease and the water reservation agreement was accounted for as a separate executory contract.
Coinmint Co-location Mining Services AgreementContingent consideration liability
OnIn February 2021, the State of Texas experienced an extreme and unprecedented winter weather event that resulted in prolonged freezing temperatures and caused an electricity generation shortage that was severely disruptive to the whole state. While demand for electricity reached extraordinary levels due to the extreme cold, the supply of electricity significantly decreased in part because of the inability of certain power generation facilities to supply electric power to the grid. Due to the extreme market price of electricity during this time, at the request of ERCOT, the Company stopped supplying power to its customers and instead sold power back to the grid.
In April 8, 2020,2021, under the provisions of the PPA, and as a result of the weather event, the Company entered into a Qualified Scheduling Entity (“QSE”) Letter Agreement, which resulted in the Company being entitled to receive approximately $125.1 million for its power sales during the February winter storm, all under the terms and conditions of the QSE Letter Agreement. The Company received cash of $29.0 million in April 2021 (after deducting $10.0 million in power management fees owed by Whinstone), approximately $59.7 million was credited against power bills of the Company during 2022, with the remaining $26.3 million being contingent upon ERCOT’s future remittance. These amounts are recognized gross before fair value adjustments and expenses incurred by the Company for power management fees noted above and customer settlements. The fair value of the settlement agreement was estimated and recognized as an agreement with Coinmint, (the “Coinmint Agreement”asset as part of acquisition accounting.
As part of the Whinstone Acquisition (see Note 3. Acquisitions), pursuantthe Company is obligated to which Coinmint agreed to providepay the seller up to $86.0 million, net of income taxes, (undiscounted) of additional consideration if certain power credits are received or realized by the Company arising from the February 2021 weather event. Upon the acquisition of Whinstone, the estimated fair value of the contingent consideration was approximately 9.5 MW$83.0 million.
The estimated fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement.
F-38
Upon the acquisition of Whinstone, the Company estimated the fair value of the contingent consideration using a discounted cash flow analysis, which included 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 required significant judgment and depend on various factors outside the Company’s control, such as construction delays. The discount rate of approximately 2.5% included observable market inputs, but also included unobservable inputs such as interest rate spreads, which were estimated based on qualitative judgment related to perform all maintenance necessarycompany-specific risk factors. Specifically, the Company used S&P Global’s B credit rating in the yield curve to operate Riot’s miners atestimate a reasonable interest rate spread to determine the Coinmint facility. In exchange, Coinmint is reimbursed for direct production expenses and receivescost of debt input because the power credits are subordinated obligations of the Company’s counterparty. Although these estimates are based on management’s best knowledge of current events, the estimates could change significantly from period to period.
The following table presents the changes in the estimated fair value of our contingent consideration liability:
| | | |
Balance as of December 31, 2022 | | $ | 24,935 |
Change in contingent consideration | |
| (24,026) |
Change in fair value of contingent consideration | | | — |
Balance as of December 31, 2023 | | $ | 909 |
Approximately $1.2 million of remaining future power credits to be received are estimated to be received over a performance feeperiod of 12 years. The Company determined the value of the contingent consideration as of December 31, 2023, using a discount rate of approximately 8.0%, which was based on the net cryptocurrencies generated by Riot’s miners deployed atfactors above, including the Coinmint facility. The initial term of the Coinmint Agreement was six months with automatic renewals for subsequent three month terms until and unless terminated as providedrecent increase in the agreement.interest rates.
Contingencies
ContingenciesLegal proceedings
The Company, and itsour subsidiaries, are subject at times to various claims, lawsuits and governmental proceedings relating to the Company’sour business and transactions arising in the ordinary course of business. The CompanyWe cannot predict the final outcome of such proceedings. Where appropriate, the Companywe vigorously defendsdefend such claims, lawsuits and proceedings. Some of these claims, lawsuits and proceedings seek damages, including, direct, consequential, exemplary, and/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’sour insurance program. The Company maintainsWe maintain property, and various types of liability insurance in an effort to protect the Companyourselves from such claims. In terms of any matters where there is no insurance coverage available to the Company,us, or where coverage is available and the Company maintainswe maintain a retention or deductible associated with such insurance, the Companywe 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 us on the Company in the accompanying consolidated balance sheets.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 discloseswe disclose the range of possible loss. ExpensesPaid expenses related to the defense of such claims are recorded by the Companyus as incurred and included in the accompanying consolidated statements of operations.paid. 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’sour defense of such matters. On the basis of current information, the Company doeswe do not believe there is a reasonable possibility that other than with regard to the Class Action described below, any material loss, if any, will result from any claims, lawsuits and proceedings to which the Company iswe are subject to either individually, or in the aggregate.
Northern Data Working Capital Disputes
Shareholder Class Action Suit
On September 7, 2022, the Company filed a complaint against Northern Data AG (“Northern Data”) in the Delaware Court of Chancery (Case No. C.A. No. 2022-0792-LWW) disputing the purchase price of Whinstone and seeking declaratory relief and specific performance of the stock purchase agreement. On March 31, 2023, the parties filed a stipulation agreeing to dismiss all claims without prejudice and to submit the dispute for final determination to an independent accountant. The Company placed approximately $29.5 million in escrow pending the final determination of the independent accountant, and, on June 9, 2023, the independent accountant rendered a written final determination finding in favor of the Company on disputed issues totaling approximately $27.1 million. Accordingly, approximately $27.1 million of the escrowed amount was released from escrow and distributed to the Company on June 13, 2023, with the remaining approximately $2.4 million held in escrow allocated to Northern Data. As a result, the Company recognized a Deferred gain on acquisition post-close dispute settlement of $26.0 million on the Consolidated Balance Sheets.
F-39
Following the final determination, Northern Data filed a complaint against the Company in the Delaware Court of Chancery (the “Chancery Court”) on June 23, 2023 (Case No. C.A. No. 2023-0650-LWW) challenging the independent accountant’s written final determination and seeking to re-litigate the purchase price adjustment process. The Company contests the legal and factual basis of Northern Data’s claims and filed a motion to dismiss the complaint on July 17, 2023, which the Chancery Court heard on February 13, 2024. The Chancery Court took the matter under advisement and it is now pending a ruling. While the Company intends to vigorously oppose such complaint, the Company cannot accurately predict the outcome of such ongoing litigation, or estimate the magnitude of such outcome, due to its early stage.
Legacy Hosting Customer Disputes
Rhodium
On February 17, 2018, Creighton TakataMay 2, 2023, Whinstone filed an action asserting putative class action claims on behalf of the Company’s stockholdersa petition in the United District Court for the 20th Judicial District of New Jersey, Takata v. Riot Blockchain Inc.Milam County, Texas (Case No. CV41873), et al.which it later amended, against Rhodium 30MW, LLC, Rhodium JV, LLC, Air HPC LLC, and Jordan HPC, LLC (collectively, “Rhodium”) asserting breach of contract claims for Rhodium’s failure to pay amounts due under Rhodium’s colocation agreements with Whinstone. Whinstone seeks recovery of more than $26.0 million, plus reasonable attorneys’ fees and costs, expenses, and pre- and post-judgment interest. On June 12, 2023, Rhodium answered and, along with non-parties Rhodium Encore LLC, Rhodium 2.0 LLC, and Rhodium 10mw LLC (collectively, the “Non-Parties”), Case No. 3: 18-cv-02293. The complaint asserts violationsmoved to compel arbitration and filed counterclaims for breach of federal securities lawscontract seeking recovery of at least $7.0-$10.0 million in power credits allegedly owed to Rhodium under Section 10(b)the superseded agreements, as well as lost profits. On August 2, 2023, Rhodium disclosed the amount of damages it seeks to recover for these claims, which includes at least $42.0 million in alleged energy credits, at least $1.0 million in alleged lost profits for power diversion, and Section 20(a)at least $0.7 million in alleged direct damages for breach of contract, plus lost profits and reasonable and necessary attorneys’ fees. On August 28, 2023, the Securities Exchange Act of 1934 on behalf of a putative class of stockholders that purchased stock fromdistrict court granted Rhodium’s motion to compel arbitration and stay litigation. On November 13, 2017 through February 15, 2018. The complaint alleges that27, 2023, Whinstone terminated the CompanyRhodium JV, LLC 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 connectionAir HPC LLC hosting agreements at the Rockdale Facility with its cryptocurrency business. The complaint requests damages in unspecified amounts, costs and fees of bringing the action, and other unspecified relief.
immediate effect. 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 complaint contained substantially similar allegationsDecember 11, 2023, Rhodium and the sameNon-Parties submitted an arbitration demand to the American Arbitration Association seeking approximately $55.0 million in damages and specific performance of unspecified contracts. Whinstone believes Rhodium’s claims are without merit and intends to vigorously contest them, as those filed by Mr. Takata, and requests 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. The court also appointed Dr. Golovac as Lead Plaintiff and Motely Rice as Lead Counsel of the consolidated class action.
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Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
Lead Plaintiff filed a consolidated complaint on January 15, 2019. Defendants filed motions to dismiss on March 18, 2019. In lieu of opposing defendants’ motions to dismiss, Lead Plaintiff filed another amended complaint on May 9, 2019. Defendants filed multiple motions to dismiss the amended complaint starting on September 3, 2019.
On April 30, 2020, the court granted the motions to dismiss, which resulted in the dismissal of all claims without prejudice. On December 24, 2020, Lead Plaintiff filed another amended complaint. Defendants filed multiple motions to dismiss the amended complaint starting on February 8, 2021, which have been fully briefed. On February 28, 2022, the court issued an order instructing the parties to submit supplemental briefing by March 14, 2022 on particular issues raised in the motions to dismiss.appropriate. Because this litigation is still at this early stage, wethe Company cannot reasonably estimate the likelihood of an unfavorable outcome or the magnitude of such an outcome, if any.
Shareholder Derivative Cases
SBI Crypto Co.
On April 5, 2018, Michael Jackson2023, SBI Crypto Co., Ltd. (“SBI”) filed a shareholder derivative complaint on behalf of the Company in the Supreme Court of the State of New York, County of Nassau, against certain of the Company’s officers and directors, as well as against an investor (Jackson v. Riot Blockchain, Inc., et al., Case No. 604520/18). The complaint contains similar allegations to those contained in the shareholder class action complaints and seeks recovery for alleged breaches of fiduciary duty, unjust enrichment, waste of corporate assets, abuse of control and gross mismanagement. The complaint seeks unspecified monetary damages and corporate governance changes. At the last preliminary conference, the court adjourned the conference until June 21, 2022 in lieu of staying the action. Defendants do not anticipate any other activity on this case until the next preliminary conference.
On May 22, 2018, two additional shareholder derivative complaints were filed on behalf of the Company in the Eighth Judicial District Court of the State of Nevada in and for the County of Clark (Kish v. O’Rourke, et al., Case No. A-18-774890-B & Gaft v. O’Rourke, et al., Case No. A-18-774896-8). The two complaints make identical allegations, which are similar to the allegations contained in the shareholder class action complaints. The shareholder derivative plaintiffs also seek recovery for alleged breaches of fiduciary duty, unjust enrichment, waste of corporate assets, and aiding abetting a breach of fiduciary duty. The complaints seek unspecific monetary damages and corporate governance changes.
On September 24, 2018, the court entered an order consolidating the Gaft and Kish actions, which is now styled as In re Riot BlockChain, Inc. Shareholder Derivative Litigation, Case No. A-18-774890-B. The plaintiffs filed a consolidated complaint on March 15, 2019. The consolidated action has been temporarily stayed until the resolution of the motion(s) to dismiss in the securities class action pending in the United States District Court for the Western District of New Jersey.
On October 9, 2018, another shareholder derivative complaint was filed on behalf of the Company in the United District Court for the Eastern District of New York (Rotkowitz v. O’Rourke, et al.Texas (Case No. 6:23-cv-252), Case No. 2:18-cv-05632). As with the other shareholder derivative actions, the shareholder plaintiff allegeswhich it later amended, against Whinstone alleging breach of fiduciary duty, waste of corporate assets,contract, fraud, and unjust enrichment against certain of the Company’s officers, directors, and an investor. The complaint’s allegations are substantially similar to those made in the other securities class action and shareholder derivative complaints filed in 2018. The complaint seeks unspecific monetary damages and corporate governance changes. The partiesnegligent bailment claims. On July 21, 2023, Whinstone filed a motion withto dismiss the court to temporarily stay this action until the resolutionamended complaint, which was denied on October 25, 2023. SBI seeks recovery of at least $15.0 million in lost profits, at least $16.0 million for equipment damage, reasonable attorneys’ fees and costs, expenses, costs, and pre- and post-judgment interest. Whinstone believes many of the motion(s) to dismiss in the securities class action pending in the United District Court for the District of New Jersey. In response, the court dismissed the action without prejudice with leave to refile a complaint following the resolution of the motion(s) to dismiss in the securities class action pending in the United District Court for the District of New Jersey.
On October 22, 2018, another shareholder derivative complaint was filed on behalf of the Company in the United District Court for the Southern District of New York (Finitz v. O’Rourke, et al., Case No. 1:18-cv-09640). The shareholder plaintiffs allege breach of fiduciary duty, waste of corporate assets,claims are barred or waived and unjust enrichment against certain of the Company’s officers, directors,substantively lack merit, and an investor. The complaint’s allegations are substantially similar to those made in the other securities class action and shareholder derivative complaints filed in 2018. The complaint seeks unspecific monetary damages and corporate governance changes. Upon the parties’ stipulation, the court issued an order temporarily staying this action until the resolution of the motion(s) to dismiss in the securities class action pending in the United District Court for the District of New Jersey.
F-47
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
On December 13, 2018, another shareholder derivative complaint was filed on behalf of the Company in the United District Court for the Northern District of New York (Monts v. O’Rourke, et al., Case No. 1:18-cv-01443). The shareholder plaintiffs allege claims for violation of Section 14(a) of the Securities Exchange Act of 1934, breach of fiduciary duties, unjust enrichment, waste of corporate assets, and aiding and abetting against certain of the Company’s officers, directors, and an investor. The complaint’s allegations are substantially similar to those made in the other securities class action and shareholder derivative complaints filed in 2018. The complaint seeks unspecific monetary damages and corporate governance changes. Upon the parties’ stipulation, the court issued an order temporarily staying this action until the resolution of the motion(s) to dismiss in the securities class action pending in the United District Court for the District of New Jersey.
Defendants intendWhinstone plans to vigorously contest plaintiffs’ allegations in the shareholder derivative actions and plaintiffs’ right to bringsame, as appropriate. While a preliminary investigation of the action in the namemerits of Riot Blockchain. ButSBI’s claims has commenced, because this litigation is still at this early stage, wethe Company cannot reasonably estimate the likelihood of an unfavorable outcome or the magnitude of such an outcome, if any.
GMO
On June 13, 2022, GMO Gamecenter USA, Inc. and its parent, GMO Internet, Inc., (collectively “GMO”) filed a complaint against Whinstone alleging breach of contract under the colocation services agreement between GMO and Whinstone, seeking damages in excess of $150.0 million. The case is pending in the United States District Court for the Southern District of New York (Case No. 1:22-cv-05974-JPC). Whinstone has responded to GMO’s claims and raised counterclaims of its own, alleging GMO itself breached the colocation services agreement, seeking a declaratory judgment and damages in excess of $25.0 million. On October 19, 2023, GMO filed its fourth amended complaint claiming an additional $496.0 million in damages, for loss of profit and profit sharing, based on Whinstone’s alleged wrongful termination of the colocation services agreement as of June 29, 2023. At this preliminary stage, the Company believes that GMO’s claims lack merit; however, because this litigation is still at this early stage, the Company cannot reasonably estimate the likelihood of an unfavorable outcome or the magnitude of such an outcome, if any.
F-40
Class Actions and Related Shareholder Derivative Actions
On August 25, 2023, the United States District Court for the District of New Jersey dismissed the Takata v. Riot Blockchain action (Case No. 3: 18-cv-02293, the “Takata Action”), with prejudice, dismissing all claims.
Following the dismissal of the Takata Action, all shareholder derivative complaints filed against the Company were subsequently dismissed without prejudice. On October 23, 2023, the parties in Jackson v. Riot Blockchain, Inc., et al. (Case No. 604520/18) filed a joint stipulation of discontinuance dismissing all claims without prejudice. On January 18, 2023, the Eighth Judicial District Court of the State of Nevada entered an order voluntarily dismissing In re Riot Blockchain, Inc. Shareholder Derivative Litigation (Case No. A-18-774890-B) without prejudice. On October 6, 2023, plaintiff filed a notice in Finitz v. O’Rourke, et al. (Case No. 1:18-cv-09640) voluntarily dismissing all claims without prejudice. On September 26, 2023, plaintiff filed a notice in Monts v. O’Rourke, et al. (Case No. 1:18-cv-01443) voluntarily dismissing all claims without prejudice.
Note 16.18. Income taxes
The following table presents the components of the loss from continuing operations before provision for income taxes for the years ended December 31, 2021, 2020 and 2019 are as follows (in thousands):
For the years ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Domestic | $ | (7,672 | ) | $ | (12,667 | ) | $ | (20,446 | ) | |||
Foreign | — |
| — | — | ||||||||
Loss from Continuing Operations before Income Taxes | $ | (7,672 | ) | $ | (12,667 | ) | $ | (20,446 | ) |
F-48
Riot Blockchain, Inc. and Subsidiariestaxes:
Notes to Consolidated Financial Statements
| | | | | | | | | |
| | For the years ended December 31, | |||||||
|
| 2023 |
| 2022 |
| 2021 | |||
Domestic | | $ | (54,565) | | $ | (521,302) | | $ | (15,183) |
Foreign | |
| — | |
| — | |
| — |
Loss before provision for income taxes | | $ | (54,565) | | $ | (521,302) | | $ | (15,183) |
(in thousands, except for share and per share amounts)
The following table presents the components of income tax benefit (expense) are as follows (in thousands):
| | | | | | | | | |
| | As of December 31, | |||||||
|
| 2023 |
| 2022 |
| 2021 | |||
Current: | | |
| | |
| | |
|
US Federal | | $ | — | | $ | — | | $ | — |
US State | |
| 48 | |
| (789) | |
| (254) |
Foreign | |
| — | |
| — | |
| — |
Total current benefit (expense) | | $ | 48 | | $ | (789) | | $ | (254) |
Deferred: | |
|
| |
|
| |
|
|
US Federal | | $ | 5,045 | | $ | 12,538 | | $ | — |
US State | |
| — | |
| — | |
| — |
Foreign | |
| — | |
| — | |
| — |
Total deferred benefit | |
| 5,045 | |
| 12,538 | |
| — |
Total benefit (expense) for income taxes | | $ | 5,093 | | $ | 11,749 | | $ | (254) |
As of December 31, | ||||||||||||
2021 |
| 2020 | 2019 | |||||||||
Current: | ||||||||||||
US Federal | $ | — |
| $ | — | $ | — | |||||
US State | (254 | ) | — | — | ||||||||
Foreign | — | — | — | |||||||||
Total current benefit (expense) | $ | (254 | ) | $ | — | $ | — | |||||
Deferred: | ||||||||||||
US Federal | $ | — | $ | — | $ | 117 | ||||||
US State | — | — | 26 | |||||||||
Foreign | — | — | — | |||||||||
Total deferred benefit | — | — | 143 | |||||||||
Total benefit (expense) for income taxes | $ | (254 | ) | $ | — | $ | 143 |
F-41
The following table presents the tax effects of temporary differences and tax loss and credit carry forwards that give rise to significant portions of deferred tax assets and liabilities at December 31, 2021 and 2020 are comprised of the following (in thousands):liabilities:
As of December 31, | ||||||||||||||
2021 |
| 2020 | ||||||||||||
| | | | | | | ||||||||
| | As of December 31, | ||||||||||||
|
| 2023 |
| 2022 | ||||||||||
Deferred income tax assets: | | |
| | |
| ||||||||
Net operating loss carryforwards | $ | 64,394 | $ | 51,938 | ||||||||||
Research and development credit carryforwards | 1,063 | 1,063 | ||||||||||||
Long-term investments | 3,402 | - | ||||||||||||
Operating lease liabilities | 1,454 | - | ||||||||||||
Stock option expense | 15,827 | 1,253 | ||||||||||||
Impairment of mining related assets and other | 10,504 | 803 | ||||||||||||
Operating lease liability | | $ | 4,485 | | $ | 5,178 | ||||||||
Deferred revenue | |
| 3,735 | |
| 4,595 | ||||||||
Stock compensation | |
| 2,348 | |
| 17,422 | ||||||||
Bitcoin | | | — | | | 29,111 | ||||||||
Intangible assets | | | 6,523 | | | 6,501 | ||||||||
Net operating losses | | | 116,872 | | | 150,167 | ||||||||
Other deferred tax assets | | | 2,058 | | | 2,393 | ||||||||
Total deferred tax assets | 96,644 | 55,057 | |
| 136,021 | |
| 215,367 | ||||||
Valuation allowance | (59,039 | ) | (55,057 | ) | |
| (65,600) | |
| (108,060) | ||||
Net deferred tax assets | 37,605 | - | |
| 70,421 | |
| 107,307 | ||||||
Deferred income tax liabilities: | |
|
| |
|
| ||||||||
Derivative asset | (5,477 | ) | - | |
| (21,898) | |
| (22,678) | |||||
Property and equipment and other | (32,128 | ) | - | |||||||||||
Right of use asset | | | (4,289) | | | (5,043) | ||||||||
Fixed assets | | | (19,189) | | | (79,586) | ||||||||
Bitcoin | | | (23,300) | | | — | ||||||||
Other deferred tax liabilities | | | (1,745) | | | — | ||||||||
Total deferred tax liabilities | |
| (70,421) | |
| (107,307) | ||||||||
Net deferred tax assets (liabilities) | $ | - | $ | - | | $ | — | | $ | — |
The Company has approximately $264.9$528.0 million and $219.6$171.0 million of federal and state tax Net Operating Losses (“NOLs”), respectively, that may be available to offset future taxable income. Federal and state net operating loss carryforwards of $125.2$130.0 million and $147.1$101.0 million, respectively, if not utilized, expire between 2026 and 2037. Under the Tax Cuts and Jobs Act, $139.7$398.0 million federal and $72.5$70.0 million state NOLs incurred after December 31, 2017 are carried forward indefinitely, but may be limited in utilization to 80% of taxable income. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) signed in to law on March 27, 2020, provided that NOLs generated in a taxable year beginning in 2018, 2019, or 2020, may be carried back five years and forward indefinitely. In addition, the 80% taxable income limitation is temporarily removed, allowing NOLs to fully offset net taxable income.
Furthermore, as a result of changes in the ownership of our common stock and changes in our business operations, our ability to use our federal and state NOLs may be subject to annual limitations limited under Internal Revenue Code Section 382 and 383. State NOLsThe annual limitations may result in the expiration of net operating losses and credits before they are subjectable to similar limitationsbe utilized. The Company does not expect any previous ownership changes, as defined under Section 382 and 383 of the Internal Revenue Code, to result in many cases. As a result, our substantial NOLs may not have any value to us.an ultimate limitation that will materially reduce the total amount of net operating loss carryforwards and credits that can be utilized.
The statute of limitations for assessment by the IRS and state tax authorities is open for tax years ending December 31, 20172018 through 2021,2023, although carryforward attributes that were generated prior to tax year 20172018 may still be adjusted upon examination by the IRS or state tax authorities if they either have been or will be used in a future period. Currently, no federal or state income tax returns are under examination by the respective taxing authorities.
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and taxing strategies in making this assessment. In case the deferred tax assets will not be realized in future periods, the Company has provided a valuation allowance for the full amount of the deferred tax assets atas of December 31, 20212023 and 2020.2022. The valuation allowance increaseddecreased by approximately $4.0$42.5 million during the year ended December 31, 2021.2023.
F-49F-42
Riot Blockchain,Platforms, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
The expectedfollowing table reconciles the income tax expense (benefit)benefit (expense) based on the U.S. federal statutory rate is reconciled with actual income tax expense (benefit) as follows (in thousands)benefit (expense):
For the years ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Statutory federal income tax expense (benefit) | $ | (1,611 | ) | $ | (2,660 | ) | $ | (4,293 | ) | |||
State taxes, net of federal tax expense (benefit) | 347 | (471 | ) | (664 | ) | |||||||
Nondeductible/nontaxable items | 1,732 | (45 | ) | 1,142 | ||||||||
Tax return to provision true-up | 313 | (8,737 | ) | - | ||||||||
State tax rate change | (1,897 | ) | 2,231 | - | ||||||||
Other | - | - | 195 | |||||||||
Change in valuation allowance | 1,370 | 9,682 | 3,477 | |||||||||
Income taxes expense (benefit) | $ | 254 | $ | - | $ | (143 | ) |
| | | | | | | | |
| | For the years ended December 31, | ||||||
| | 2023 | | 2022 | ||||
Federal statutory rate |
| $ | 11,459 | 21.0% |
| $ | 109,376 | 21.0% |
State and local taxes, net of federal taxes | |
| 42 | (0.1)% | |
| 3,403 | 0.7% |
Goodwill impairment | |
| — | 0.0% | |
| (64,295) | (12.3)% |
Contingent payment | | | 5,045 | 9.3% | | | 12,538 | 2.4% |
Section 162m compensation | | | (21,315) | (39.1)% | | | (11,433) | (2.2)% |
Stock compensation | | | 2,648 | 4.9% | | | 2,904 | 0.6% |
Return to provision | | | (2,760) | (5.1)% | | | 9,026 | 1.7% |
Rate change on deferreds | |
| 3,919 | 7.2% | |
| (3,321) | (0.6)% |
Deferred adjustment | |
| (36,159) | (66.3)% | |
| — | 0.0% |
Other | |
| (244) | 0.5% | |
| — | 0.0% |
Change in valuation allowance | |
| 42,458 | 77.8% | |
| (46,449) | (8.9)% |
Income tax benefit (expense) | | $ | 5,093 | 9.3% | | $ | 11,749 | 2.3% |
The Company has not identified any uncertain tax positions requiring a reserve as of December 31, 20212023 and 2020.2022. The Company’s policy is to recognize interest and penalties that would be assessed in relation to the settlement value of unrecognized tax benefits as a component of income tax expense. The Company did not accrue either interest or penalties for the years ended December 31, 20212023 and 2020.2022.
The Company is subject to U.S. federal income tax and primarily Florida, Colorado, and Texas state income tax. The Company has not been under tax examination in any jurisdiction for the years ended December 31, 20212023 and 2020.2022.
Note 19. Earnings Per Share
The following table presents potentially dilutive securities that are not included in the computation of diluted net income (loss) per share as their inclusion would be anti-dilutive:
Note 17. Animal Health License Agreements
| | | | | | |
|
| December 31, | ||||
|
| 2023 |
| 2022 |
| 2021 |
Warrants to purchase common stock |
| 63,000 |
| 63,000 |
| 63,000 |
Unvested restricted stock awards (a) | | 9,824,546 | | — | | — |
Unvested restricted stock units |
| 401,639 |
| — |
| 4,015,146 |
Convertible Series B preferred shares |
| — |
| — |
| 2,199 |
Total |
| 10,289,185 |
| 63,000 |
| 4,080,345 |
Ceva License Agreement
In July 2012, the Company entered into an exclusive license agreement (the “License Agreement”) with Ceva Santé Animale S.A. (“Licensee”), under which the Company granted the Licensee an exclusive royalty-bearing license, until December 31, 2028, to the Company’s intellectual property and other assets, including both (a) the Company’s patent rights and know-how, relating to recombinant single chain reproductive hormone technology for use in non-human mammals (the “Company’s Animal Health Assets”) and (b) the technology licensed to the Company by Washington University in St. Louis (“WU”). The WU license agreement expired under its terms in 2020, with no impact on the License Agreement. The License Agreement contains termination provisions as defined in the License Agreement.
Under the License Agreement, the Licensee obtained a worldwide exclusive license to develop, seek regulatory approval for and offer to sell, market, distribute, import and export luteinizing hormone (“LH”) and/or follicle-stimulating hormone (“FSH”) products for bovine (cattle), equine and swine in the field of the assistance and facilitation of reproduction in bovine, equine and swine animals. The Company also granted the Licensee an option and right of first refusal to develop additional animal health products outside of the licensed field of use or any diagnostic pregnancy detection tests for non-human mammals.
Under the License Agreement as of December 31, 2021, the Company would be entitled to receive future payments if Ceva achieves certain regulatory approvals as further outlined in the License Agreement.
The upfront license fees received from the License Agreement have been recorded as deferred revenue and are amortized over the term of the License Agreement. License fees revenue totaling a net of approximately $1.6 million commenced being amortized in July 2012. As of December 31, 2021, deferred revenue of $0.1 million has been classified as a current liability and $0.6 million has been classified as a long-term liability. The current liability represents the next twelve months’ portion of the license fees revenue. For each of the years ended December 31, 2021, 2020 and 2019, approximately $0.1 million was recorded as the amortized license fee revenue.
F-50
(a) | Unvested restricted stock awards are included in total common shares outstanding but are excluded from the calculation of basic earnings per share. |
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except for share and per share amounts)
Note 18.20. Segment Information
The Company applies ASC 280, Segment Reporting, in determining its reportable segments. The Company has three reportable segments: Bitcoin Mining, Data Center Hosting, and Engineering. The guidance requires that segment disclosures presentreportable segments are identified based on the measure(s) used by the Chief Operating Decision Maker (“CODM”) to decide how to allocate resources and for purposestypes of assessing such segments’ performance. The Company’s CODM is comprised of several members of its executive management team who use revenue and cost of revenues of our three reporting segments to assess the performance of the business of our reportable operating segments.
No operating segments have been aggregated to form the reportable segments. The Company does not allocate all assets to the reporting segments as these are managed on an entity-wide basis. Therefore, the Company does not separately disclose the total assets of its reportable operating segments. $29.4 million of goodwill from the ESS Metron acquisition is allocated to our Engineering segment and $306.2 million of goodwill from the Whinstone Acquisition is allocated to our Hosting segment.service performed.
The Bitcoin Mining segment generates revenue from the cryptocurrencyBitcoin the Company earns through its mining activities. Bitcoin Mining cost of revenue consists primarily of direct production costs of mining operations, including electricity, labor, insurance, variable data center hosting fees, but excluding depreciation and amortization.
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 high performance data center facility in Rockdale, Texas. Data Center Hosting cost of revenue consists primarily of direct power costs, rent and compensation costs.
F-43
The Engineering segment generates revenue through customer contracts for custom engineered electrical products. Engineering cost of revenue consists primarily of direct materials and labor, as well as indirect manufacturing costs.
The CODM analyzes the performance of the segments based on reportable segment revenue and reportable segment cost of revenue. 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 Data Center Hosting segment purchases custom engineered electrical products from the Engineering segment in the ordinary course of business. TheAll revenue and cost of revenuesrevenue from intersegment transactions have been eliminated in the consolidated statementsConsolidated Statements of operations in accordance with US 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 totalOperations. All Other revenue and total cost of revenue total to the consolidated statements of operations. All other revenues are is from external customers. No
Concentrations
During the years ended December 31, 2023 and 2021, aside from the Bitcoin Mining revenue generated as a result of the Company’s participation in a mining pool, no single customer or related group of customers contributed 10% or more of the Company’s total consolidated revenue during the years ended December 31, 2021, 2020 and 2019. However, two customers accounted for approximately 97% of the Company’s Hosting revenue..
ForDuring the year ended December 31, 2021, approximately 75%2022, aside from the Bitcoin Mining revenue generated as a result of the Company’s Miningparticipation in a mining pool, the Company earned revenue was generatedof approximately $29.7 million from one customer, representing 11.4% of the Coinmint FacilityCompany’s total consolidated revenue, in New York,its Engineering segment. No other individual customer accounted for more than 10% of total revenue for the year ended December 31, 2022.
As of December 31, 2023 and the remaining 25% was generated from our Whinstone Facility in Rockdale, Texas.2022, five customers accounted for more than 70% and 80%, respectively, of consolidated accounts receivable, net.
F-44
The following table detailspresents revenue and cost of revenuesrevenue for the Company’s reportable segments, forreconciled to the years ended December 31, 2021, 2020 and 2019, and reconciles to net income (loss) in the consolidated statementsConsolidated Statements of operations (in thousands):Operations:
F-51
| | | | | | | | | |
| | Years Ended December 31, | |||||||
|
| 2023 |
| 2022 |
| 2021 | |||
Reportable segment revenue: | | |
| | |
| | |
|
Bitcoin Mining | | $ | 188,996 | | $ | 156,870 | | $ | 184,422 |
Data Center Hosting | |
| 154,334 | |
| 101,718 | |
| 24,546 |
Engineering | |
| 72,826 | |
| 85,358 | |
| 5,265 |
Other revenue | |
| 97 | |
| 97 | |
| 97 |
Eliminations | |
| (135,574) | |
| (84,872) | |
| (1,087) |
Total segment and consolidated revenue | | $ | 280,679 | | $ | 259,171 | | $ | 213,243 |
| | | | | | | | | |
Reportable segment cost of revenue: | |
|
| |
|
| |
|
|
Bitcoin Mining | |
| 134,515 | |
| 84,897 | |
| 45,513 |
Data Center Hosting | |
| 186,256 | |
| 116,200 | |
| 32,998 |
Engineering | |
| 66,277 | |
| 70,283 | |
| 4,351 |
Eliminations | |
| (132,714) | |
| (77,684) | |
| (769) |
Total segment and consolidated cost of revenue | | $ | 254,334 | | $ | 193,696 | | $ | 82,093 |
| | | | | | | | | |
Reconciling Items: | |
|
| |
|
| |
|
|
Acquisition-related costs | |
| — | |
| (78) | |
| (21,198) |
Selling, general, and administrative | |
| (100,346) | |
| (67,452) | |
| (87,429) |
Depreciation and amortization | |
| (252,354) | |
| (107,950) | |
| (26,324) |
Change in fair value of Bitcoin | | | 184,734 | | | — | | | — |
Change in fair value of derivative asset | |
| 6,721 | |
| 71,418 | |
| 12,112 |
Power curtailment credits | | | 71,215 | | | 27,345 | | | 6,514 |
Change in fair value of contingent consideration | |
| — | |
| 159 | |
| (975) |
Realized gain on sale of Bitcoin | |
| — | |
| 30,346 | |
| 253 |
(Loss) gain on sale/exchange of equipment | | | (5,336) | | | 16,281 | | | — |
Casualty-related (charges) recoveries, net | |
| 5,974 | |
| (9,688) | |
| — |
Impairment of Bitcoin | | | — | | | (147,365) | | | (43,973) |
Impairment of goodwill | |
| — | |
| (335,648) | |
| — |
Impairment of miners | | | — | |
| (55,544) | |
| — |
Interest income (expense) | |
| 8,222 | |
| 454 | |
| (296) |
Realized loss on sale of marketable equity securities | |
| — | |
| (8,996) | |
| — |
Realized gain on sale/exchange of long-term investment | | | — | | | — | | | 26,260 |
Unrealized loss on marketable equity securities | |
| — | |
| — | |
| (13,655) |
Other income (expense) | |
| 260 | |
| (59) | |
| 2,378 |
Current income tax benefit (expense) | | | 48 | |
| (789) | |
| (254) |
Deferred income tax benefit (expense) | |
| 5,045 | |
| 12,538 | |
| — |
Net income (loss) | | $ | (49,472) | | $ | (509,553) | | $ | (15,437) |
Riot Blockchain, Inc. and Subsidiaries
F-45
Note 21. Impacts of Adoption of ASU 2023-08
The following tables present a summary of the impacts of the adoption of ASU 2023-08, effective January 1, 2023, on the Company’s interim Condensed Consolidated Statements of Operations provided during the year ended December 31, 2023 (all amounts are unaudited):
| | | | | | | | | |
| | For the three months ended March 31, 2023 | |||||||
Consolidated Statements of Operations | | As previously | | Effects | | As adjusted | |||
Total revenue | | $ | 73,236 | | $ | — | | $ | 73,236 |
Realized gain on sale of Bitcoin | | | (13,775) | | | 13,775 | | | — |
Impairment of Bitcoin | | | 4,472 | | | (4,472) | | | — |
Change in fair value of Bitcoin | | | — | | | (83,504) | | | (83,504) |
Operating income (loss) | | | (56,827) | | | 74,201 | | | 17,374 |
Net income (loss) | | $ | (55,688) | | $ | 74,201 | | $ | 18,513 |
Basic net income (loss) per share | | $ | (0.33) | | $ | 0.44 | | $ | 0.11 |
Diluted net income (loss) per share | | $ | (0.33) | | $ | 0.44 | | $ | 0.11 |
Basic weighted average number of shares outstanding | | | 167,342,500 | | | — | | | 167,342,500 |
Diluted weighted average number of shares outstanding | | | 167,342,500 | | | 4,771,833 | | | 172,114,333 |
(in thousands, except for share and per share amounts)
Years Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Reportable segment revenue: | ||||||||||||
Revenue, net - mining | $ | 184,422 | $ | 11,984 | $ | 6,741 | ||||||
Revenue, net - hosting | 24,546 | - | - | |||||||||
Revenue, net - engineering | 5,265 | - | - | |||||||||
Other revenue | 97 | 97 | 96 | |||||||||
Eliminations | (1,087 | ) | - | - | ||||||||
Total segment and consolidated revenue | 213,243 | 12,081 | 6,837 | |||||||||
Reportable segment cost of revenue (exclusive of depreciation and amortization shown below): | ||||||||||||
Cost of revenues - mining | 45,513 | 6,251 | 6,097 | |||||||||
Cost of revenues - hosting | 32,998 | - | - | |||||||||
Cost of revenues - engineering | 4,351 | - | - | |||||||||
Eliminations | (769 | ) | - | - | ||||||||
Total segment and consolidated cost of revenues (exclusive of depreciation and amortization shown below) | 82,093 | 6,251 | 6,097 | |||||||||
Reconciling Items: | ||||||||||||
Acquisition-related costs | (21,198 | ) | - | - | ||||||||
Selling, general and administrative | (87,429 | ) | (10,251 | ) | (9,159 | ) | ||||||
Depreciation and amortization | (26,324 | ) | (4,494 | ) | (119 | ) | ||||||
Change in fair value of derivative asset | 18,626 | - | - | |||||||||
Change in fair value of contingent consideration | (975 | ) | - | - | ||||||||
Realized gain on sale/exchange of cryptocurrencies | 253 | 5,184 | 665 | |||||||||
Impairment of intangible rights acquired | - | - | (700 | ) | ||||||||
Impairment of long-term investment | - | (9,413 | ) | - | ||||||||
Impairment of cryptocurrencies | (36,462 | ) | (989 | ) | (844 | ) | ||||||
Loss on issuance of convertible notes, common stock and warrants | - | - | (6,155 | ) | ||||||||
Change in fair value of warrant liability | - | - | (2,869 | ) | ||||||||
Change in fair value of convertible notes | - | - | (3,896 | ) | ||||||||
Reversal of registration rights penalty | - | 1,358 | - | |||||||||
Gain on deconsolidation of Tess | - | - | 1,139 | |||||||||
Gain (loss) on sale of equipment | - | 29 | - | |||||||||
Interest income (expense) | - | 85 | - | |||||||||
Interest expense | (296 | ) | - | (122 | ) | |||||||
Other income (expense) | 2,378 | (6 | ) | 874 | ||||||||
Realized gain on sale/exchange of long-term investment | 26,260 | - | - | |||||||||
Unrealized loss on marketable equity securities | (13,655 | ) | - | - | ||||||||
Current income tax expense | (254 | ) | - | - | ||||||||
Deferred income tax benefit | - | - | 143 | |||||||||
Net loss | $ | (7,926 | ) | $ | (12,667 | ) | $ | (20,303 | ) |
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| | | | | | | | | | | | | | | | | | |
| | For the three months ended June 30, 2023 | | For the six months ended June 30, 2023 | ||||||||||||||
Consolidated Statements of Operations | | As previously | | Effects | | As adjusted | | As previously | | Effects | | As adjusted | ||||||
Total revenue | | $ | 76,739 | | $ | — | | $ | 76,739 | | $ | 149,975 | | $ | — | | $ | 149,975 |
Realized gain on sale of Bitcoin | | | (19,828) | | | 19,828 | | | — | | | (33,603) | | | 33,603 | | | — |
Impairment of Bitcoin | | | 5,638 | | | (5,638) | | | — | | | 10,110 | | | (10,110) | | | — |
Change in fair value of Bitcoin | | | — | | | (14,490) | | | (14,490) | | | — | | | (97,994) | | | (97,994) |
Operating income (loss) | | | (32,483) | | | 300 | | | (32,183) | | | (89,310) | | | 74,501 | | | (14,809) |
Net income (loss) | | $ | (27,687) | | $ | 300 | | $ | (27,387) | | $ | (83,375) | | $ | 74,501 | | $ | (8,874) |
Basic and diluted net income (loss) per share | | $ | (0.17) | | $ | 0.01 | | $ | (0.16) | | $ | (0.51) | | $ | 0.46 | | $ | (0.05) |
Basic and diluted weighted average number of shares outstanding | | | 167,342,813 | | | — | | | 167,342,813 | | | 162,559,956 | | | — | | | 162,559,956 |
Riot Blockchain, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, 2023 | | For the nine months ended September 30, 2023 | ||||||||||||||
Consolidated Statements of Operations | | As previously | | Effects | | As adjusted | | As previously | | Effects | | As adjusted | ||||||
Total revenue | | $ | 51,891 | | $ | — | | $ | 51,891 | | $ | 201,866 | | $ | — | | $ | 201,866 |
Realized gain on sale of Bitcoin | | | (13,495) | | | 13,495 | | | — | | | (47,098) | | | 47,098 | | | — |
Impairment of Bitcoin | | | 4,041 | | | (4,041) | | | — | | | 14,151 | | | (14,151) | | | — |
Change in fair value of Bitcoin | | | — | | | 25,261 | | | 25,261 | | | — | | | (72,733) | | | (72,733) |
Operating income (loss) | | | (47,831) | | | (34,715) | | | (82,546) | | | (137,141) | | | 39,786 | | | (97,355) |
Net income (loss) | | $ | (45,325) | | $ | (34,715) | | $ | (80,040) | | $ | (128,700) | | $ | 39,786 | | $ | (88,914) |
Basic and diluted net income (loss) per share | | $ | (0.25) | | $ | (0.19) | | $ | (0.44) | | $ | (0.76) | | $ | 0.23 | | $ | (0.53) |
Basic and diluted weighted average number of shares outstanding | | | 180,952,689 | | | — | | | 180,952,689 | | | 168,758,240 | | | — | | | 168,758,240 |
(in thousands, except for share and per share amounts)
Note 19. Subsequent Events:
Restricted stock
Subsequent to December 31, 2021, the Company granted 43,149 time-based restricted stock units with a fair value
F-46
Subsequent to December 31, 2021, 937,530 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 414,441 of these shares at a fair value of approximately $8.2 million, to cover withholding taxes related to the settlement of these vested restricted stock units, as permitted by the 2019 Equity Plan.
Preferred stockContents
Subsequent to December 31, 2021, 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.
Ground lease and water reservation agreement amendments
Subsequent to December 31, 2021, the Company executed a third lease amendment to the ground lease for the Whinstone facility, to add to the existing 100-acre tract of land, a second contiguous 100-acre tract of real property for an additional $0.9 million in annual payments. The initial term of the lease is scheduled to expire on January 31, 2032. Concurrent with this third amendment, the Company executed a first amendment to the water reservation agreement to obtain additional water from a nearby lake to be used by the Company for commercial purposes, such as evaporative cooling in our data center facility, for an additional $1.0 million in annual payments. The term of the original water reservation agreement was reset for a period of twelve years from the original commencement date of April 2021, now expiring on January 31, 2032.
The Company has evaluated all events that occurred after the balance sheet date through the date when the financial statements were issued. No other significant recognized or non-recognized subsequent events were noted.
F-53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.As of May 18, 2023, the Company dismissed Marcum LLP (“Marcum”) as it’s independent registered public accounting firm, not as a result of any disagreement on any matter of accounting principles or practices, financial statement disclosure, or audit scope or procedure.
During the Company’s fiscal year ended December 31, 2022, as well as the subsequent interim periods through Marcum’s dismissal, there were no disagreements within the meaning of Item 304(a)(1)(iv) of Regulation S-K with Marcum on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to Marcum’s satisfaction, would have caused Marcum to make reference to the subject matter of the disagreements in connection with its reports on the Company’s financial statements for such fiscal years. There was a reportable event within the meaning of Item 304(a)(1)(v) of Regulation S-K during the fiscal year ended December 31, 2022, taking the form of an adverse opinion on the effectiveness of the Company’s internal control over financial reporting related to the existence of a material weakness for the fiscal year ended December 31, 2022. Specifically, Marcum’s report contained an adverse opinion regarding the Company’s control pertaining to the review of its Bitcoin for potential impairment.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controlsdisclosure controls and Proceduresprocedures
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 the end of the period covered by this Annual ReportDecember 31, 2023 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. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
Based on this evaluation, our management, with the participation of our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial officer), concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of December 31, 2021 due to the material weaknesses described below.2023.
As further discussed below under “Management’s Report on Internal Control Over Financial Reporting,” management has identified material weaknesses in our information technology (IT) general controls (collectively, “ITGCs”) and related IT-dependent process level controls and business combination accounting controls, which are part of our internal control over financial reporting. We have developed a remediation plan for each weakness, which is described below under “Remediation.” Further, the report of our independent registered public accounting firm for the fiscal year ended December 31, 2021, Marcum LLP, regarding its audit of our internal control over financial reporting as of December 31, 2021, which is included below under the heading “Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting”, expresses an adverse opinion on our internal control over financial reporting as of December 31, 2021.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures.
Changes in Internal Controlinternal control
We periodically review our internal control over financial reporting as part of our efforts to ensure compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002.Act. In addition, we routinely review our system of internal control over financial reporting to identify potential changes to our processes and systems that may improve controls and increase efficiency, with the goal of establishing and maintaining an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating the activities of business units, migrating certain processes to our shared services organizations, formalizing policies and procedures, improving segregation of duties and increasing monitoring controls. In addition, when we acquire new businesses, we incorporate our controls and procedures into the acquired business as part of our integration activities. 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
There have been no changes in our internal control over financial reporting that occurred during the fiscal yearthree months ended December 31, 20212023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Reportreport on Internal Controlinternal control over Financial Reportingfinancial reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2023.
Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
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Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management utilized the criteria established in the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to assess the effectiveness of our internal control over financial reporting as of December 31, 2023. Based on our management’s assessment and those criteria, our management concluded that our internal control over financial reporting was effective as of December 31, 2023.
Our independent registered public accounting firm, Deloitte & Touche LLP, has issued an audit report on management’s assessment of internal control over financial reporting as of December 31, 2023. The report of Deloitte & Touche LLP is included below under the heading “Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting”.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Riot Platforms, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Riot Platforms, Inc. and subsidiaries (the “Company”) as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2023, of the Company and our report dated February 22, 2024 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s early adoption of Accounting Standards Update (“ASU”) No. 2023-08, Intangibles-Goodwill and Other-Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets (“ASU 2023-08”).
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
68
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim consolidated financial statements will not be prevented or detected on a timely basis./s/ DELOITTE & TOUCHE LLP
Our management excluded from its assessment of effectiveness of our internal control over financial reportingHouston, Texas
February 22, 2024
ITEM 9B. OTHER INFORMATION
During the internal controls of our two recently acquired significant subsidiaries, Whinstone, which we acquired as of May 26, 2021, and ESS Metron, which we acquired as of December 1, 2021. We have included the financial results of these subsidiaries in the consolidated financial statements from the date of acquisition. Total assets (excluding goodwill and intangible assets, net) and total revenues related to Whinstone and ESS Metron that were excluded from our assessment of internal control over financial reporting collectively represented approximately 20.4% and 13.5% of our consolidated total assets and total revenue as of and for the yearthree months ended December 31, 2021, respectively. Our management will include the internal controls of Whinstone and ESS Metron in its assessment of the effectiveness2023, none of our internal control over financial reporting as of December 31, 2022.
Management utilizeddirectors or officers (as defined in Rule 16a-1(f) under the criteria established inExchange Act) adopted, modified, or terminated any contract, instruction or written plan for the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to assess the effectivenesspurchase or sale of our internal control over financial reporting assecurities that was intended to satisfy the affirmative defense conditions of December 31, 2021. Based on this evaluation, management identified the following weaknesses in internal control over financial reporting as described below:
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.
Our independent registered public accounting firm, Marcum LLP, has issued an audit report on management’s assessment of internal control over financial reporting as of December 31, 2021. The report of Marcum LLP, which expresses an adverse opinion on the Company’s internal control over financial reporting as of December 31, 2021, is included belowRule 10b5-1(c) under the heading “ReportExchange Act or any “non-Rule 10b5-1 arrangement” as defined in Item 408(c) of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting”.
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) develop robust processes to validate all data that is received from third-parties and relied upon to generate financial statements. In order 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.
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.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Stockholders and Board of Directors of
Riot Blockchain, Inc.
Adverse Opinion on Internal Control over Financial Reporting
We have audited Riot Blockchain Inc. and Subsidiaries’ (the "Company") internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the material weaknesses described in the following paragraph on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
A material weakness is a control deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in “Management’s Annual Report on Internal Control Over Financial Reporting”:
Regulation S-K.
These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the fiscal 2021 consolidated financial statements, and this report does not affect our report dated March 16, 2022 on those financial statements.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets as of December 31, 2021 and 2020, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes, of the Company and our report dated March 16, 2022 expressed an unqualified opinion on those financial statements.
Explanatory Paragraph – Excluded Subsidiaries
As described in “Management’s Annual Report on Internal Control Over Financial Reporting”, management has excluded its wholly-owned subsidiaries, Whinstone US, Inc. and Ferrie Franzmann Industries, LLC (d/b/a ESS Metron), from its assessment of internal control over financial reporting as of December 31, 2021 because these entities were acquired by the Company in business combinations during 2021. We have also excluded Whinstone US, Inc. and ESS Metron from our audit of internal control over financial reporting. These subsidiaries’ combined total assets and total revenues represent approximately 20.4% and 13.5%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2021.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that degree of compliance with the policies or procedures may deteriorate.
/s/ Marcum llp
Marcum LLP
Los Angeles, CA
March 16, 2022
ITEM 9B. OTHER INFORMATION.
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.INSPECTIONS
None.Not applicable.
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PART III
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
Board of Directors
GOVERNANCE
The names of the members of the Company’s Board of Directors (the “Board” or the “Board of Directors”), their respective ages, and their positions with the Company as of April 29, 2022 are set forthinformation required by this Part III, Item 10 is included in the following table:
Director Background and Qualifications
Hubert Marleau has served as a director on the Company’s Board, including as a member of each of its three standing committees, which are its Audit Committee (the “Audit Committee”), its Compensation and Human Resources Committee (the “Compensation and Human Resources Committee”), and its Governance and Nominating Committees (the “Governance and Nominating Committee”), since November 2020. Mr. Marleau currently serves as the Board’s Lead Independent Director and as chair of the Governance and Nominating Committee. As the Board’s Lead Independent Director, Mr. Marleau chairs those Board meetings from which our Executive Chairman, Mr. Benjamin Yi, is required to abstain from the meeting under the Company’s bylaws, the applicable rules and regulations of the Nasdaq Rules, the rules and regulations of the SEC, or Nevada law, as applicable. The Board has affirmatively determined that Mr. Marleau meets the director independence standards of the Nasdaq Rules and the SEC, including the enhanced standards requireddefinitive proxy statement for members of the Audit Committee and the Compensation and Human Resources Committee. Further, based on his experience and financial expertise described below, the Board has determined that Mr. Marleau qualifies as an “audit committee financial expert” (as that term is defined in Item 407(d) of Regulation S-K) and has designated him as one of two audit committee financial experts presently serving on the Audit Committee.
Mr. Marleau is a veteran capital markets professional, corporate director, and Chair of the Marleau Lecture Series on Economic and Monetary Policy at the University of Ottawa. Mr. Marleau’s broad areas of expertise include macroeconomic policy & analysis, corporate governance, financial analysis, and investment banking, having served on the board of directors for more than fifty U.S. and Canadian publicly traded companies throughout his career. Presently, Mr. Marleau serves as a member of the board of directors of Niocan, Inc. (TSX-V: NIO; OCTMKTS: NIOCF), a Montreal, Canada-based metals and minerals mining company, and of Premier Health of America Inc. (TSX-V: PHA), a Blainville, Québec-based specialized healthcare staffing and outsourcing services company, where he serves as president of its audit committee.
Mr. Marleau also has extensive capital markets experience, having raised funds privately and publicly for hundreds of emerging and mature companies, structured numerous mergers and acquisitions, and acted as the driving force behind numerous transactions throughout his career. Currently, he serves as Chief Economist at Palos Management, a Montreal, Canada-based boutique investment management firm he co-founded. In addition to a career in the capital markets that has spanned over five decades, Mr. Marleau has previously served as a Governor of the Toronto, Montreal and Vancouver stock exchanges, as a Director of the Listing Committee for the Toronto Stock Exchange, and as Director of the Investment Dealers Association of Canada (now known as IIROC). Mr. Marleau holds an Honours Bachelor of Social Sciences in Economics from the University of Ottawa.
We believe Mr. Marleau is qualified to serve as a director on Riot’s Board based on his extensive corporate governance and public company board experience, and because he brings over five decades of dedicated financial markets and economics experience to the Company. He brings his extensive experience and expertise to Board discussions and policymaking decisions, helping to assist the Board shape its strategic vision for the Company and as it seeks to continue to establish, oversee and improve Company policies designed to drive the growth of the Company and protect stockholder interests.
Hannah Cho has served as a director on the Company’s Board, including as a member of each of its three standing committees, since February 2021. Ms. Cho currently serves as chair of the Compensation and Human Resources Committee. The Board has affirmatively determined that Ms. Cho meets the director independence standards of the Nasdaq Rules and the SEC, including the enhanced standards required for members of the Audit Committee and the Compensation and Human Resources Committee.
Ms. Cho is a veteran marketing and communications professional with a career of over fifteen years in the enterprise technology industry. She brings significant executive leadership experience in the enterprise technology brand marketing, product and corporate communications fields, which she gained at leading technology companies including Anaplan, CA Technologies, Intel Corporation, and Cisco Systems. She has leveraged her experience to assist global, multinational organizations across all stages of the business life-cycle, from growth and expansion, to rebranding efforts, to M&A, IPO and divestiture.
Currently, Ms. Cho is Vice President, Marketing Communications at BMC Software, a portfolio company of KKR which offers software and services to support cloud computing, IT service management, automation, IT operations, and the mainframe for digital transformation. Prior to BMC Software, she was Senior Vice President, Technology Communications at Edelman, a Chicago-based global public relations and marketing consultancy firm. She holds a BA Honours in Criminology from Carleton University.
We believe Ms. Cho is qualified to serve as a director on Riot’s Board based on her extensive experience in the enterprise technology industry, and because she is able to bring her significant knowledge and expertise in the marketing and communications aspects of the enterprise technology space to bear to help the Board establish policies and strategies to assist the Company in navigating the public discourse regarding the Bitcoin mining industry. Ms. Cho leverages her executive leadership experience, as well as her marketing and communications expertise in the enterprise technology space during Board discussions and strategic policymaking decisions to assist the Board as it seeks to continue to establish, oversee and improve Company policies designed to drive the growth of the Company and protect stockholder interests.
Lance D’Ambrosio has served as a director on the Company’s Board, including as a member of each of its three standing committees, since May 2021. Mr. D’Ambrosio currently serves as the chair of the Audit Committee. The Board has affirmatively determined that Mr. D’Ambrosio meets the director independence standards of the Nasdaq Rules and the SEC, including the enhanced standards required for members of the Audit Committee and the Compensation and Human Resources Committee. Further, based on his experience and financial expertise described below, the Board has determined that Mr. D’Ambrosio qualifies as an “audit committee financial expert” (as that term is defined in Item 407(d) of Regulation S-K) and has designated him as one of two audit committee financial experts presently serving on the Audit Committee.
Mr. D’Ambrosio has over thirty years’ experience as a corporate officer and director, including in corporate governance, capital raising, financial analysis, mergers and acquisitions, and complex international structuring. Mr. D’Ambrosio currently serves as the Managing Partner of 4 D Investments, a company which focuses on technology and real estate investments. Prior to 4 D Investments, Mr. D’Ambrosio served as the chief executive officer and chairman of the board of directors of Crystal Peak Minerals, a Canadian public company focused on precious metals mining, from 2010 to 2018.
As a corporate executive, Mr. D’Ambrosio has founded and grown numerous companies spanning several industries including the telecommunications, materials, and automotive sectors. Over the course of his career, he has led capital raising efforts totaling hundreds of millions of dollars, executed on over thirty corporate acquisitions, successfully taken a number of companies public on both U.S. and international exchanges, and successfully sold several businesses to larger market participants, including Sprint Telecommunications and Comsat International, a subsidiary of Lockheed Martin.
He also has significant experience as an entrepreneur, having founded several companies spanning a broad spectrum of industries, including the telecommunications, materials, and automotive sectors. Mr. D’Ambrosio has been recognized as a recipient of the Ernst & Young and Merrill Lynch Entrepreneur of the Year Award in the category of e-Software & Services, and holds Bachelor of Science in Marketing and Bachelor of Science in Management degrees from the University of Utah, where he graduated in 1979 as a member of the Dean’s Honor List.
We believe Mr. D’Ambrosio is qualified to serve as a director on Riot’s Board based on his extensive experience as a corporate executive, entrepreneur, and board member. He is able to leverage his substantial corporate governance and finance experience during Board discussions and strategic policymaking decisions to help the Board establish, oversee and improve Company policies designed to drive growth of the Company and protect stockholder interests.
Benjamin Yi has served as a director on the Company’s Board since 2018 and as its Chair since November 2020. Effective May 24, 2021, Mr. Yi was appointed Executive Chairman of the Board, a role in which he serves as both Board chair and as an executive officer of the Company. The Board determined to appoint Mr. Yi as Executive Chairman to better allow the Company to leverage his considerable knowledge of the Company, leadership abilities, and corporate governance, executive and capital markets experience to help it carry out the strategic initiatives set by the Board.
Mr. Yi has previously served as a member of each of the Board’s three standing committees, however, as of May 24, 2021, upon his appointment as the Company’s Executive Chairman, Mr. Yi resigned from his positions on the Audit Committee (including from his position as its chair), the Compensation and Human Resources Committee, and the Governance and Nominating Committee. As Executive Chairman, Mr. Yi continues to be a director on the Board, where he plays an integral role in establishing the Board’s strategic vision for the Company and, except when the Company’s bylaws, the Nasdaq Rules, the rules and regulations of the SEC, or Nevada law require him to abstain from the meeting, serve as Board chair.
In addition to his significant experience as a member of our Board and as one of our executive officers, Mr. Yi brings significant corporate governance experience to Riot’s Board, having served as an independent director and committee chair of several private and public companies. Prior to joining Riot’s Board in 2018, Mr. Yi served as an Independent Director and Chair of the Corporate Governance and Remuneration Committee of PetroMaroc Corporation, plc (formerly TSX-V: PMA), a Toronto-based energy company, from December 2013 to December 2016; as a member of the Board of Managers and Audit Committee of Android Industries, LLC, a privately held Michigan-based assembler of complex modules for the automotive industry, from January 2014 to September 2016; and as an Independent Director, member, and occasional Chair of the Audit Committee of Woulfe Mining Corp. (formerly CSE: WUF), a Vancouver-based mining company, from October 2013 to its acquisition in September 2015.
Mr. Yi also brings over fifteen years of unique capital markets experience to the Company, and a particular expertise in fintech, specialty finance, and investing throughout a company’s capital structure. Prior to his appointment as our Executive Chairman, Mr. Yi headed the capital markets and corporate development efforts at IOU Financial Inc. (TSX-V: IOU; OCTMKTS: IOUFF), a Montreal-based fintech-enabled lender to small businesses across North America. Previously, Mr. Yi worked directly under Ned Goodman, a renowned Canadian financier, investor, and founder of Dundee Corporation (TSE: DC.A; OCTMKTS: DDEJF), a Toronto-based conglomerated investment and corporate development company focused on the mining sector. At Dundee Corporation, he worked in a corporate development and investment capacity, investing throughout the capital structure of companies involved in the natural resource extraction, energy technology, real estate, and automotive sectors. Prior to Dundee Corporation, Mr. Yi was a securities analyst at the predecessor to 1832 Asset Management L.P., where he covered energy and special situations investments as part of a team managing one of North America’s largest natural resources-focused investment funds.
Mr. Yi is a CFA charter holder, and he holds a Master of Finance degree from the University of Toronto Rotman School of Management and a Bachelor of Commerce degree from Trinity College in University of Toronto.
We believe Mr. Yi is qualified to serve as a director on Riot’s Board based on his knowledge of the Company, his service as a member of its Board of Directors since 2018, his past service as chair of the Audit Committee and the Compensation and Human Resources Committee, and because he brings over fifteen years of dedicated financial markets experience to the Company. Mr. Yi leverages his expertise in capital markets and corporate development as a Board member to help shape Board discussions and strategic policymaking decisions as it seeks to continue to establish, oversee and improve Company policies designed to drive the growth of the Company and protect stockholder interests. Further, as a member of the Company’s executive team, Mr. Yi applies his expertise to assist the Company in carrying out the Board’s strategic vision.
Jason Les has served as a director on the Company’s Board since November 2017 and, effective February 8, 2021, was appointed to serve as the Company’s Chief Executive Officer. Prior to his appointment as Chief Executive Officer, Mr. Les had served as a member of each of the Board’s three standing committees, including as chair of the Compensation and Human Resources Committee.
Mr. Les is the driving force behind the Company’s mission to become one of the most relevant and significant companies supporting the Bitcoin network. He has been deeply involved with Bitcoin since 2013, with significant experience in cryptocurrency mining, as an engineer studying protocol development, and contributing to open-source projects. He was also a founding partner of Binary Digital, a software-development company where he led the engineering team and coordinated project development for artificial intelligence, reverse engineering, and inter-software compatibility projects. Additionally, his background includes over a decade of unique experience as a former professional heads-up poker player, during which he has successfully competed in high-stakes games online, in addition to the most prestigious, high-stakes tournaments in the world. In 2015 and 2017, he was selected as a human benchmark for testing the world’s best poker artificial intelligence in what was dubbed “Man vs Machine” at Carnegie Mellon University. Mr. Les holds a Bachelor of Science in Information & Computer Science from U.C. Irvine.
We believe Mr. Les is qualified to serve as a director on Riot’s Board based on his knowledge of the Company, his service as its Chief Executive Officer and, before that, as a director on the Board, and because he has been an active participant in the cryptocurrency industry since 2013. Mr. Les brings technical expertise regarding Bitcoin mining and protocol development, as well as his astute understanding of the overall Bitcoin industry and his commitment to educating the public about Bitcoin and Bitcoin mining, to Board discussions and strategic policymaking decisions that help the Board establish, oversee and improve Company policies designed to drive growth of the Company and protect stockholder interests.
Board Composition
The Company’s business affairs are managed under the direction of our Board. The Board consists of five members, including three independent directors, Hannah Cho, Hubert Marleau, and Lance D’Ambrosio, whom the Audit Committee has determined are “independent directors” within the meaning of the Nasdaq Rules and applicable SEC rules and regulations, and two non-independent, executive directors, Benjamin Yi and Jason Les.
Under our Bylaws, the Board is divided into three classes (Class I, Class II and Class III) serving successive three-year terms, with only one class of directors being elected in each year However, because the classified board structure provided under our Bylaws was not previously in effect when it was enacted at the2024 annual meeting of stockholders held in fiscal year 2021, these successive three-year director terms(our “2024 Proxy Statement”), which will be enacted on a rolling basis at the annual meeting of stockholders to be held in fiscal year 2022 and the annual meeting of stockholders to be held in fiscal year 2023. Accordingly, the Board is divided into the following three classes:
At each annual meeting of stockholders, the successors to directors whose terms then expire will be elected to serve from the time of their election and qualification until the third annual meeting of the Company’s stockholders following their election and until their successors are duly elected and qualified. This classification of the Board may have the effect of delaying or preventing changes in the Company’s control or management for the purpose of continuing the long-term strategic plans of the Company.
Committees of the Board of Directors
Our Board has three standing committees: (1) the Audit Committee; (2) the Compensation and Human Resources Committee; and (3) the Governance and Nominating Committee. Each of these standing committees is solely comprised of and chaired by three independent directors, each of whom the Board has affirmatively determined is “independent” within the meaning of the Nasdaq Rules and applicable SEC rules and regulations. Each of the committees operates pursuant to its charter, copies of which are available on the Investors page of our corporate website, www.riotblockchain.com. The committee charters are reviewed annually by the Governance and Nominating Committee. If appropriate, and in consultation with the chairs of the other committees, the Governance and Nominating Committee proposes revisions to the charters. The responsibilities of each of the standing committees of the Board are described in more detail below.
Audit Committee
The Board maintains a separately designated Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. Pursuant to its charter (a copy of which is available on the Investors page of our corporate website, www.riotblockchain.com/investors/corporate-governance, under the “Governance” tab), the Audit Committee is responsible for, among other things, periodically reviewing overall enterprise risk management, in addition to maintaining responsibility for oversight of financial reporting-related risks, including those related to the Company’s accounting, auditing and financial reporting practices. The Audit Committee also reviews reports and considers any material allegations regarding potential violations of the Company’s Code of Ethics.
The current members of the Audit Committee are: (i) Mr. Lance D’Ambrosio (chair); (ii) Mr. Hubert Marleau; and (iii) Ms. Hannah Cho. Our Board of Directors has determined that each member of the Audit Committee meets the additional independence criteria for members of an Audit Committee under the Nasdaq Rules and applicable SEC rules, including the requirements under Rule 10A-3(b)(1) of the Exchange Act. In addition, our Board of Directors has determined that each member of the Audit Committee is financially literate, and that Messrs. D’Ambrosio and Marleau each meets the qualifications of an “audit committee financial expert” within the meaning of Rule 407(d)(5) of Regulation S-K based on the experience and qualifications described in this Item 10 under the heading “Director Background and Qualifications” above.
Compensation and Human Resources Committee
Pursuant to its charter (a copy of which is available on the Investors page of our corporate website, www.riotblockchain.com, under the “Governance” tab), the Compensation and Human Resources Committee is responsible for, among other things, overseeing and evaluating risks arising from the Company’s compensation policies and programs. The Compensation and Human Resources Committee has responsibility for evaluating, overseeing, and approving the Company’s executive compensation and benefit plans, policies and programs, including administering the Riot Blockchain, Inc. 2019 Equity Incentive Plan, as amended (the “2019 Equity Plan”).
The current members of the Compensation and Human Resources Committee are: (i) Ms. Hannah Cho (chair); (ii) Mr. Hubert Marleau; and (iii) Mr. Lance D’Ambrosio. The Board has affirmatively determined that each member of the Compensation and Human Resources Committee is “independent” within the meaning of applicable SEC rules and regulations and meets the additional independence criteria applicable to Compensation and Human Resources Committee members under the Nasdaq Rules.
Governance and Nominating Committee
Pursuant to its charter (a copy of which is available on the Investors page of our corporate website, www.riotblockchain.com, under the “Governance” tab), the Governance and Nominating Committee oversees corporate governance risks and oversees and advises the Board with respect to the Company’s policies and practices regarding significant issues of corporate responsibility. The Governance and Nominating Committee is responsible for, among other things: conducting an annual evaluation of the Board and its committees; recommending candidates for nomination, election or appointment to the Board and its committees; and taking a leadership role in shaping our corporate governance, including developing and recommending to the Board our Corporate Governance Policies.
The current members of the Compensation and Human Resources Committee are: (i) Mr. Hubert Marleau (chair); (ii) Mr. Lance D’Ambrosio; and (iii) Ms. Hannah Cho. The Board has affirmatively determined that each member of the Governance and Nominating Committee is “independent” within the meaning of the Nasdaq Rules and applicable SEC rules, and that each member meets the additional requirements of the Nasdaq Rules for members of the Compensation and Human Resources Committee.
Risk Oversight
Our Board is responsible for overseeing our risk management process. Our Board focuses on our general risk management strategy, the most significant risks facing us, and will oversee the implementation of risk mitigation strategies by management. Our Board is also apprised of particular risk management matters in connection with its general oversight and approval of corporate matters and significant transactions.
Family Relationships
There arefiled no family relationships among any of the directors and executive officers of the Company, and there are no understandings or arrangements between the directors and any other person(s) pursuant to which the directors were or are to be selected or nominated as a director.
Director Independence
Each director holds his or her office until a successor is duly elected and qualified at an annual stockholder meeting, or until his or her earlier death, resignation, or removal. Except for our executive directors, Messrs. Benjamin Yi and Jason Les, who serve as our Executive Chairman and our Chief Executive Officer, respectively, the Board has determined that each member of the Board of Directors is “independent” within the meaning of the Nasdaq Rules and applicable SEC rules and regulations.
Code of Ethics and Corporate Governance Policies
We have adopted a Code of Ethics and Business Conduct, Corporate Governance Guidelines, and other governance policies (collectively, our “Governance Policies”) to which all of our employees, executive officers, and directors (referred to as “Covered Persons” in our Governance Policies) are required to adhere in addressing the legal and ethical issues encountered in conducting their work. Our Governance Policies require that all Covered Persons avoid conflicts of interest, comply with all laws and other legal requirements, conduct business in an honest and ethical manner, and otherwise act with integrity. Our Governance Policies require all Covered Persons to report any conduct that they believe is an actual or apparent violation of our Corporate Guidelines and may do so anonymously by contacting the Compliance Officer designated by the Board. To date, there have been no waivers under our Governance Policies. We disclose on our website any amendment to, or waiver of, any provision of our Governance Policies that is required to be disclosed pursuant to applicable securities laws. Copies of our Governance Policies are available to stockholders free of charge upon request or may be viewed or downloaded from the Investor page of our website, www.riotblockchain.com. Requests for print copies of our Governance Policies should be addressed to our corporate secretary as follows: Riot Blockchain, Inc., 3855 Ambrosia Street, Suite 301, Castle Rock, Colorado 80109, Attention: Corporate Secretary.
Executive Officers
Our executive officers as of April 29, 2022 are set forth in the table below:
Jason Les. For a brief biography of Riot’s Chief Executive Officer (principal executive officer), Mr. Jason Les, see the disclosure under the heading “Director Biographical Information and Qualifications” under the “Board of Directors” section of this Item 10 above.
Benjamin Yi. For a brief biography of Riot’s Executive Chairman, Mr. Benjamin Yi, see the disclosure under the heading “Director Biographical Information and Qualifications” under the “Board of Directors” section of this Item 10 above
Jeffrey G. McGonegal is Riot’s longtime Chief Financial Officer (principal financial officer) and has been an executive officer of the Company since 2003, but for a brief period between April 2018 and February 2019 during which he served as a consultant to the Company advising on financial accounting and disclosure matters. On February 5, 2019, he was appointed to serve as Riot’s Chief Executive Officer, and on August 15, 2019, he was re-appointed to his longtime position as the Company’s Chief Financial Officer. On February 8, 2021, following the appointment of Mr. Les as Chief Executive Officer, Mr. McGonegal agreed to remain in his longtime role as Riot’s Chief Financial Officer.
Mr. McGonegal’s career has spanned over forty years in senior leadership roles working primarily with public entities, assisting them with financing, merger, and acquisition transactions. Mr. McGonegal had previously served as the Company’s long time Chief Financial Officer until April 2018 and subsequently had been assisting Riot Blockchain in a consulting role before assuming the role of Chief Executive Officer of the Company in early 2019. In August of 2019, Mr. McGonegal also agreed to serve as acting Chief Financial Officer of the Company following the departure of the Company’s previous Chief Financial Officer. From 1974 to 1997, Mr. McGonegal was an accountant with BDO USA, LLP (formerly BDO Seidman LLP). While at BDO, Mr. McGonegal served as Managing Partner of the Denver, Colorado office. He received a B.S. degree in accounting from Florida State University.
Mr. McGonegal has been with the Company for over a decade, and he brings a wealth of public company executive and financial reporting experience, including senior leadership roles working primarily with public entities assisting them with financing, merger, and acquisition transactions, to the position of Chief Financial Officer of the Company.
William R. Jackman, Esq., is the General Counsel of Riot and manages the Company’s legal affairs. As General Counsel, Mr. Jackman draws upon his unique business and legal acumen to support the Riot leadership team navigate strategic decisions by developing innovative solutions.
Mr. Jackman has represented Riot since September 2018 as external counsel, prior to joining the management team in July 2021. Previously, Mr. Jackman represented S&P 500 companies as well as other public companies in the areas of securities laws, mergers and acquisitions, and power generation. Additionally, he is a former member of several distinguished law firms including, a global AM100 law firm, and one the largest global law firms in Canada. In 2014, he served a secondment at the Ontario Securities Commission (OSC) in the Corporate Finance division.
Mr. Jackman holds dual juris doctorate law degrees from the Universities of Windsor and Detroit, as well as an MBA from Nova Southeastern, specializing in corporate finance, where he graduated among the top of his classes in each degree. Mr. Jackman is a member of the New York, Florida and Ontario Bar Associations.
Compensation Discussion & Analysis
The following discussion and analysis of compensation arrangements of our named executive officers for the year ended December 31, 2021 should be read together with the compensation tables and related disclosures set forth below. This discussion contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act that are based on our current assumptions, expectations and beliefs regarding future events affecting our compensation programs. Actual events may differ materially from our current assumptions, expectations and beliefs, and thus, the forward-looking statements contained in the following discussion may prove inaccurate. For more information regarding the forward-looking statements used in this section and elsewhere in this Amendment No. 1, see the Cautionary Note Regarding Forward-Looking Statements at the forepart of the Original Form 10-K.
The following discussion and analysis relates to the compensation of our named executive officers (within the meaning of Item 402(a)(3) of Regulation S-K) for the year ended December 31, 2021. The 2021 compensation provided to our named executive officers is detailed in the Summary Compensation Table and the subsequent tables, as well as the accompanying footnotes and the narrative disclosures following the tables. While the following discussion and analysis is focused on our named executive officers for 2021, much of the discussion and analysis applies broadly across our executive ranks. Our named executive officers for 2021 were:
Compensation Philosophy and Objectives
Compensation Philosophy
We believe our people are the core driving force behind our long-term success. Our compensation philosophy is designed to align compensation with the Company’s business objectives and the creation of stockholder value.. Accordingly, we compensate our executive officers with a mix of cash salaries, annual performance-based cash bonuses based on the executive officer’s individual performance, and time-based equity and performance-based equity awards granted under the Company’s 2019 Equity Plan. These equity awards are generally awarded as grants of restricted stock units (“RSUs”) that vest, in the case of RSUs subject to a service requirement, in connection with the recipient’s continuing service with the Company though the designated vesting date for the applicable award or portion of the award, and in the case of performance-based awards, upon the Company’s achievement of certain performance metrics, as determined by the Compensation and Human Resources Committee as the administrator of the Company’s 2019 Equity Plan. We believe granting our executives (and our employees more generally) equity compensation encourages them to operate like owners, linking their financial interests with the interests of our stockholders. As the Company grows, we will continue to evaluate our compensation philosophy and programs to ensure they continue to meet our objectives.
Compensation Objectives
We designed our compensation program for all employees, including our named executive officers, to support our four main compensation objectives:
Compensation-Setting Process
Compensation and Human Resources Committee’s Oversight of Executive Compensation
The Board has delegated to its Compensation and Human Resources Committee the authority and responsibility for evaluating, overseeing, and approving the Company’s executive compensation, and for overseeing and administering the Company’s compensation policies and programs, including administering the Company’s 2019 Equity Plan and its other employee benefit plans and programs. When evaluating the compensation of our executive officers, the Compensation and Human Resources Committee evaluates factors including the executive’s responsibilities, experience and the competitive marketplace. The Compensation and Human Resources Committee may also invite the Company’s senior executives and other members of management to participate in its deliberations, or to provide information to the Compensation and Human Resources Committee for its consideration with respect to such deliberations, except that no named executive officer may not be present for the Compensation and Human Resources Committee’s deliberations of, or voting to approve, his or her compensation. Named executive officers may, however, be present for the deliberation of, or the voting to approve, the compensation for any other officer. The Compensation and Human Resources Committee has authority to retain such compensation consultants, outside counsel and other advisors as the Compensation and Human Resources Committee in its sole discretion deems appropriate.
Use of Compensation Consultants
On an annual basis, the Compensation and Human Resources Committee directs its compensation consultant, Meridian Compensation Partners (“Meridian”), to review the Company’s compensation practices. Based on Meridian’s assessment, the Compensation and Human Resources Committee determines whether the overall executive compensation program is consistent with our business strategy and objectives and promotes our compensation philosophy. The Compensation and Human Resources Committee also takes into account the performance, experience, skills, level of responsibility and future potential of each named executive officer ratherlater than adhering to a specific benchmarked percentage for any of our named executive officers.
Role of Stockholder “Say-on-Pay” Advisory Votes
We hold a stockholder advisory “say-on-pay” vote regarding the compensation of our named executive officers for the immediately preceding fiscal year, giving our stockholders the opportunity to weigh in on our named executive officers’ compensation as a whole. While these “say-on-pay” votes are advisory in nature, the Compensation and Human Resources Committee values the input of our stockholders and takes the results of these annual votes under strong consideration when evaluating the effectiveness of the Company’s executive compensation practices.
Key Elements of Executive Compensation
The Company operates in a highly competitive and rapidly evolving industry. Our goal is to align our executive compensation program with creating long-term value for our stockholders. The key elements of our executive compensation include:
and
Annual Incentive Plan (AIP)
Each year, the Compensation and Human Resources Committee establishes performance targets, target bonus amounts (generally as a percentage of the applicable employee’s base salary for the year), target award opportunities and other terms and conditions of annual cash bonuses for each of our named executive officers and employees eligible to participate in the AIP. Generally, employees become eligible to participate in the AIP120 days after completing 90 days of continuous employment with the Company, and eligible employees must remain employed through the date the AIP bonus is paid to receive the cash incentive bonus for that year, subject to the terms of individual employment agreements and the Company’s Change In Control Policy. See “Change In Control Policy” under this Item 11 below.
The target amounts set by the Compensation and Human Resources Committee relate to quantitative performance measures, such as the number of Bitcoin the Company mines during the applicable year, and qualitative performance measures, such as the achievements of a manager’s team during the applicable year. The Compensation and Human Resources Committee has substantial flexibility in establishing performance objectives, thresholds, targets, and maximums each year. Following the end of each year, the Compensation and Human Resources Committee will determine the extent to which the performance targets were achieved and the amount of the award that is payable to the executive officers.
For fiscal year 2021, the Compensation and Human Resources Committee set the target amount at 100% of base salary, without any minimum bonus payment amount, minimum performance target achievement threshold required to be met before an AIP bonus is earned, or a maximum bonus payment amount.
Performance-Based Restricted Stock Unit Plan
Performance Plan Overview
To align the interests of our employees, including our named executive officers, with the long-term operational objectives of the Company the Compensation and Human Resources Committee approved and adopted a new performance-based restricted stock unit performance plan under the 2019 Equity Plan (the “Performance Plan”), relating to the Company’s successful achievement of certain operational and financial goals established by the Board (the “Performance Objectives”) during the Performance Plan’s three-year term, ending December 31, 2023 (the “Performance Period”). Each eligible employee is granted a target award of unvested PSUs based on the total Performance Objectives as of the start of the Performance period (each, a “Target Award”).
Performance Plan Eligibility
Under the Performance Plan, a named executive officer (and any other Company employee participating in the Performance Plan) is granted a Target Award of unvested PSUs after she or he becomes eligible and is added to the Performance Plan. Individuals become eligible to participate in the Performance Plan after completing 90 days of continuous employment with the Company. Eligible employees (including named executive officers) are added to the Performance Plan and granted a Target Award of unvested PSUs as of the first trading day of the first fiscal quarter following the date they become eligible to participate in the Performance Plan. Each eligible employee’s Target Award is eligible to vest during the Performance Period upon the Company’s achievement of Performance Objectives, as explained below.
Vesting of Target Awards
Each Target Award is eligible to vest during the Performance Period based on the Company’s achievement of the Performance Objectives, subject to the award recipient’s continued service with the Company though the date the Compensation and Human Resources Committee certifies the relevant Performance Objective has been achieved. The exact number of shares issuable pursuant to the Performance Plan depends on the level of the Company’s performance against the Performance Objectives, and in general can range from 0% to 100% of the total Target Award. Unvested PSUs corresponding to Performance Objectives that have not been achieved as of the end of the Performance Period of the end of the employee’s service with the Company will be forfeited.
Under the Performance Plan, each Target Award is divided into two Performance Objectives: (i) the Infrastructure Development Target; and (ii) the Adjusted EBITDA Target.
Infrastructure Development Target
The “Infrastructure Development Target” relates to the Company’s successful development and monetization of up to 1,500 megawatts (“MW”) of Bitcoin mining and hosting infrastructure. The Infrastructure Development Target is further divided into fifteen 100 MW project units generally corresponding to one 100 MW Bitcoin mining structure owned and operated by the Company (each, a “Project Unit”). A Project Unit may only be achieved once, and only those Project Units which have not been achieved as of the date the employee is added to the Performance Plan. Each Project Unit consists of the following three milestone goals:
1.Installation of High-Voltage Energy Infrastructure. One-third of the Project Unit will vest upon the successful installation of the electricity transmission infrastructure interconnected to grid and capable of delivering usable power to the Bitcoin mining structure.
2.Development of Miner-Ready Infrastructure. One-third of the Project Unit will vest upon the successful development of a miner-ready building, which is deemed to occur when a Bitcoin mining structure has: (i) sufficient racking installed to house miners capable of utilizing the full usable electrical capacity of the building; (ii) highspeed internet and electrical power (including all of the medium and low voltage equipment necessary to deliver power to operating miners) connected to the racks; and (iii) the cooling system (air or immersion) installed and ready for operation.
and
3.Monetization of Capacity. One-third of the Project Unit will vest upon the installation and operation of miners (whether the Company’s miners deployed in a self-mining capacity, or third-party miners installed in a hosted capacity) utilizing the full usable power capacity of the Miner-Ready Infrastructure installed at the Bitcoin mining structure.
The Compensation and Human Resources Committee assesses the Company’s achievement of the Infrastructure Development Target (and thus, the vesting of PSUs allocated to the Project Units under the Infrastructure Development Target) on a quarterly basis, once results for the preceding fiscal quarter are available for the Compensation and Human Resources Committee’s review. Accordingly, the PSUs allocated to the portions of the Project Unit(s) achieved during the preceding fiscal quarter will vest upon on the Compensation and Human Resources Committee’s certification that such portions of the Project Unit(s) have been achieved, provided the award recipient remains employed by the Company through the date the Compensation and Human Resources Committee certifies such achievement.
Adjusted EBITDA Target
The “Adjusted EBITDA Target” relates to the Company’s achievement of financial performance objectives established by the Board based on increases in the Company’s annual Adjusted EBITDA (a non-GAAP financial measure used by the Board to assess performance). The Adjusted EBITDA Target is divided into ten $50 million Adjusted EBITDA milestones (i.e., up to $500 million in total added Adjusted EBITDA), each of which can only be achieved once during the Performance Period. The Compensation and Human Resources Committee assesses the Company’s achievement of Adjusted EBITDA milestones annually, and PSUs relating to the Adjusted EBITDA Target vest upon the Compensation and Human Resources Committee’s certification that an Adjusted EBITDA milestone has been achieved. Any unvested PSUs allocated to the Adjusted EBIDTA Target that are unvested as of the end of the Performance Period or the earlier end of the employee’s service with the Company will be forfeited. For more explanation of the Company’s use of Adjusted EBITDA, see the discussion of under the heading “Non-GAAP Measures” in the MD&A under Part II, Item 7 of this Annual Report.
Change In Control Policy
We believe that to properly motivate and incentivize our executive team in the event of a change in control and to the possibility of a termination without “cause” or a termination with “good reason,” a standardized “double trigger” change in control and severance policy is critical. We have agreed to provide payments and benefits to our named executive officers and certain other executive officers in the event of a termination without “cause” or by the officer for “good reason” following a change in control transaction. Our Compensation and Human Resources Committee approves all change in control compensation and periodically evaluates the appropriateness of such compensation in light of advice from the Board’s compensation advisers, Meridian, as well as the directors’ evaluation of the Company, its competitors, and the Bitcoin mining industry generally. We believe that these change in control benefits assist to maximize stockholder value and maintain our named executive officers’ focus in the period prior to, during and after the change in control event.
Clawback Policy
We believe that it is important to foster and maintain a culture that emphasizes integrity and accountability. For this reason, we enter into executive employment agreements with our named executive officers that provide the Company with the ability to recover certain incentive compensation paid or payable to named executive officer under certain circumstances, such as a material restatement of all or a portion of our financial statements caused by or partially caused by the named executive officer’s misconduct (the “Clawback Policy”). The Clawback Policy generally permits us to require that any current or former named executive officer who is (or was) subject to Section 16 of the Exchange Act, repay certain cash-based incentive compensation or performance-based equity compensation to the Company if the Compensation and Human Resources Committee determines that such named executive officer’s misconduct actions caused or partially caused the Company to restate all or a portion of its financial statements within the applicable period from the original filing date of the restated financial statements. If the Compensation and Human Resources Committee determines that any such cash-based incentive compensation or performance-based equity compensation would have been less had they been calculated based on the restated results, and further determines that fraud, gross negligence, or intentional misconduct by any such named executive officer caused or partially caused such restatement, and that it is in our best interests to recover all or a portion of the excess amount of cash-based incentive compensation or performance-based equity compensation received (or to be received) by such named executive officer, the Compensation and Human Resources Committee may seek to recover the difference between the amounts awarded or paid (or to be awarded or paid) and the amounts that would have been awarded or paid based on the restated results.
When the SEC adopts final clawback policy rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act, we will review and may revise our Clawback Policy to the extent required to comply with such rules.
Hedging and Pledging Policies
We have established an Insider Trading Policy, which applies to all of our employees and directors, and, among other things, prohibits short sales, engaging in transactions in publicly-traded options (such as puts and calls) and other derivative securities relating to our common stock. This prohibition extends to any hedging or similar transaction designed to decrease the risks associated with holding our securities. In addition, our named executive officers are prohibited from pledging any of our securities as collateral for a loan and from holding any of our securities in a margin account.
Tax and Accounting Considerations
Accounting Treatment
We recognize a non-cash charge to earnings for accounting purposes for equity awards. We expect that our Compensation and Human Resources Committee will continue to review and consider the accounting impact of equity awards in addition to considering the impact for dilution and overhang when deciding the amounts and terms of equity grants.
Deductibility of Executive Compensation
Code Section 162(m) may limit the amount that we may deduct from our federal income taxes for compensation paid to certain of our current or former executive officers who qualify as “covered employees” within the meaning of Code Section 162(m) to one million dollars per executive officer per year. While we are mindful of the benefit of the full deductibility of compensation, we believe that we should not be constrained by the requirements of Code Section 162(m) where those requirements would impair our flexibility in compensating our executive officers in a manner that can best promote our corporate objectives. Therefore, we have not adopted a policy that would require that all compensation be deductible, though we do consider the deductibility of compensation when making compensation decisions. We may authorize compensation payments that are not fully tax deductible if we believe that such payments are appropriate to attract and retain executive talent or meet other business objectives.
Taxation of Parachute Payments and Deferred Compensation
We have no obligation to provide any executive officer, including any named executive officer, with a “gross-up” or other reimbursement payment for any tax liability that they might owe as a result of the application of Section 280G, 4999, or 409A of the Code, however, we may provide additional payments to cover taxes due in connection with the vesting and settlement of RSU and PSU awards, or otherwise provide for net settlement of vested RSUs and PSUs to cover the state and federal taxes due thereon, as permitted under the 2019 Equity Plan and approved by the Compensation and Human Resources Committee. Sections 280G and 4999 of the Code provide that executive officers and directors who hold significant equity interests and certain other service providers may be subject to an excise tax if they receive payments or benefits in connection with a change in control that exceed certain limits prescribed by the Code, and that the employer may forfeit a deduction on the amounts subject to this additional tax. Section 409A of the Code also may impose significant taxes on a service provider in the event that they receive deferred compensation that does not comply with the requirements of Section 409A of the Code. We have structured our compensation arrangements with the intention of complying with or otherwise being exempt from the requirements of Section 409A of the Code.
Risk and Analysis of Compensation Plans
The Compensation and Human Resources Committee engaged with Meridian to assess and determine whether the design and operation of our compensation policies and practices could encourage executives or employees to take excessive or inappropriate risks that would be reasonably likely to have a material adverse effect on our Company. In assessing our policies and practices, the following factors among others were analyzed: the design; size and scope of our cash and equity incentive programs and program features that mitigate against potential risks, such as payout caps, equity award clawbacks, the quality and mix of performance-based and “at risk” compensation; various policies such as trading, severance, and benefits, and governance. After reviewing the analysis performed by Meridian, we concluded that any potential risks arising from our employee compensation policies and practices, including our executive compensation programs, are not reasonably likely to have a material adverse effect on our company.
Compensation and Human Resources Committee Report
This report of the Compensation and Human Resources Committee is required by the SEC and, in accordance with the SEC’s rules, will not be deemed to be part of or incorporated by reference by any general statement incorporating by reference into any filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate this information by reference, and will not otherwise be deemed “soliciting material” or “filed” under either the Securities Act or the Exchange Act.
The Compensation and Human Resources Committee oversees the Company’s compensation programs, policies and practices. The Compensation and Human Resources Committee has reviewed and discussed with management the foregoing “Compensation Discussion and Analysis” required by Item 402(b) of Regulation S-K. Based on such review and discussions, the Compensation and Human Resources Committee has recommended to the Board that the foregoing “Compensation Discussion and Analysis” be included in this Amendment No. 1 under Part III, Item 11 of the Company’s Annual Report for the year ended December 31, 2021.
Respectfully submitted, Compensation and Human Resources Committee of the Board of Directors of Riot Blockchain, Inc.
Hannah Cho (committee chair)
Hubert Marleau
Lance D’Ambrosio
Summary Compensation Table
This table provides summary disclosure of the compensation paid or accrued (in U.S. Dollars) to our named executive officers as of December 31, 2021 for fiscal years 2021, 2020 and 2019. The information reflected in this table and in the accompanying footnotes provides a summary, only, and should be read in conjunction with the subsequent tables and their accompanying footnotes, as well as the description of the employment agreements and related equity agreements between the Company and its named executive officers as of December 31, 2021 contained in this Item 11 below.
Name and Principal Position | Year | Salary | Bonus | Stock Awards (1) | Non-Equity Incentive Plan Compensation (2) | All Other Compensation | Total | |||||||||||||||||||||
($) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||||||||||
Jason M. Les (3) | 2021 | 631,887 | (4) | — | 20,155,500 | 1,085,963 | (5) | 3,518 | (6) | 21,876,868 | ||||||||||||||||||
Chief Executive Officer | 2020 | — | — | — | — | — | — | |||||||||||||||||||||
(principal executive officer) | 2019 | — | — | — | — | — | — | |||||||||||||||||||||
Jeffrey G. McGonegal (7), (8) | 2021 | 354,077 | — | 17,229,300 | 601,931 | 11,162 | 18,196,470 | |||||||||||||||||||||
Chief Financial Officer | 2020 | 294,103 | 90,000 | 300,000 | — | 14,478 | 698,581 | |||||||||||||||||||||
(principal financial officer) | 2019 | 252,248 | — | 175,000 | — | 89,191 | 516,439 | |||||||||||||||||||||
Megan M. Brooks (9), (10) | 2021 | 261,410 | — | 15,245,540 | 444,397 | 95,355 | 16,046,702 | |||||||||||||||||||||
Chief Operating Officer | 2020 | 175,000 | 78,000 | 144,000 | — | 4,970 | 401,970 | |||||||||||||||||||||
(former) | 2019 | 136,250 | — | 15,000 | — | 4,232 | 155,482 | |||||||||||||||||||||
Benjamin Yi (11) | 2021 | 484,857 | (12) | — | 20,123,600 | (13) | 732,153 | (14) | 5,331 | (15) | 21,345,941 | |||||||||||||||||
Executive Chairman | 2020 | — | — | — | — | — | — | |||||||||||||||||||||
2019 | — | — | — | — | — | — | ||||||||||||||||||||||
William Jackman | 2021 | 147,885 | — | 12,822,179 | 230,155 | — | 13,200,218 | |||||||||||||||||||||
General Counsel | 2020 | — | — | — | — | — | — | |||||||||||||||||||||
2019 | — | — | — | — | — | — |
Grants of Plan-Based Awards Table
The following table presents, for each of our named executive officers for the year ended December 31, 2021, information concerning each grant of an equity award made during the year ended December 31, 2021. This information supplements the information about these awards set forth in the foregoing Summary Compensation Table included under this Item 11.
Type | Estimated Possible Payouts Under Non-Equity Incentive Plan Awards (1) | Estimated Future Payouts Under Equity Incentive Plan Awards (2) | All other Stock Awards: Number of Shares of Stock or | Grant Date Fair Value of Stock and Option | ||||||||||||||||||||||||
Grant | of | Target | Target | Maximum | Units | Awards (3) | ||||||||||||||||||||||
Name | Date | Award | ($) | ($) | ($) | (#) | (#) | |||||||||||||||||||||
Jason Les | February 8, 2021 | RSU | — | — | — | 25,000 | 819,750 | |||||||||||||||||||||
Chief Executive Officer | February 8, 2021 | AIP | (4) | 656,650 | — | — | — | — | ||||||||||||||||||||
(Principal Executive Officer) | August 12, 2021 | PSU | — | 525,000 | 525,000 | — | 19,335,750 | |||||||||||||||||||||
Jeffrey McGonegal | February 7, 2021 | RSU | — | — | — | 20,000 | -655,800 | |||||||||||||||||||||
Chief Financial Officer | February 7, 2021 | AIP | 360,000 | — | — | — | — | |||||||||||||||||||||
(Principal Financial Officer) | August 12, 2021 | PSU | — | 450,000 | 450,000 | — | 16,573,500 | |||||||||||||||||||||
Benjamin Yi | February 9, 2021 | RSU | (5) | — | — | — | 10,000 | 398,600 | ||||||||||||||||||||
Executive Chairman | May 24, 2021 | RSU | (6) | — | — | — | 15,000 | 389,250 | ||||||||||||||||||||
May 24, 2021 | AIP | (7) | 432,655 | — | — | — | — | |||||||||||||||||||||
August 12, 2021 | PSU | — | 525,000 | 525,000 | — | 19,335,750 | ||||||||||||||||||||||
Megan Brooks | April 6, 2021 | RSU | — | — | — | 6,000 | 324,600 | |||||||||||||||||||||
Chief Operating Officer | April 6, 2021 | AIP | 261,410 | — | — | — | — | |||||||||||||||||||||
(former) | August 12, 2021 | PSU | — | 400,000 | 400,000 | — | 14,732,000 | |||||||||||||||||||||
November 5, 2021 | RSU | (8) | — | — | — | 6,000 | 188,940 | |||||||||||||||||||||
William Jackman | July 5, 2021 | RSU | — | — | — | 10,630 | 299,979 | |||||||||||||||||||||
General Counsel | July 5, 2021 | AIP | 147,885 | — | — | — | — | |||||||||||||||||||||
August 12, 2021 | PSU | — | 340,000 | 340,000 | — | 12,522,200 |
Outstanding Equity Awards at Fiscal Year End Table
The following table provides additional information regarding the outstanding equity awards held by our named executive officers as of December 31, 2021:
Non-Equity Incentive Plan Stock Awards | Equity Incentive Plan Awards | |||||||||||||||||||||
Type of | Number of Shares or Units of Stock That Have Not Vested | Market Value of Shares or Units of Stock That Have Not Vested (2) | Number of Unearned and Unvested Shares or Units of Stock | Market Value of Unearned and Unvested Shares or Units of Stock (2) | ||||||||||||||||||
Name | Grant Date | Award(1) | # | ($) | # | ($) | ||||||||||||||||
Jason Les (3) | February 27, 2020 | RSU | 288,617 | 6,444,818 | — | — | ||||||||||||||||
Chief Executive Officer | February 8, 2021 | RSU | 6,250 | 139,563 | — | — | ||||||||||||||||
(Principal Executive Officer) | August 12, 2021 | PSU | — | — | 475,000 | 10,606,750 | ||||||||||||||||
Jeffrey McGonegal (4) | February 7, 2021 | RSU | 5,000 | 111,650 | — | — | ||||||||||||||||
Chief Financial Officer | August 12, 2021 | PSU | — | — | 406,000 | 9,065,980 | ||||||||||||||||
(Principal Financial Officer) | ||||||||||||||||||||||
Benjamin Yi (5) | February 27, 2020 | RSU | 288,617 | 6,444,818 | — | — | ||||||||||||||||
Executive Chairman | May 24, 2021 | RSU | 7,500 | 167,475 | — | — | ||||||||||||||||
August 12, 2021 | PSU | — | — | 475,000 | 10,606,750 | |||||||||||||||||
Megan Brooks (6) | April 6, 2021 | RSU | 3,000 | 66,990 | — | — | ||||||||||||||||
Chief Operating Officer | August 12, 2021 | PSU | — | — | 360,000 | 8,038,800 | ||||||||||||||||
(Former) | November 5, 2021 | RSU | 6,000 | 133,980 | — | — | ||||||||||||||||
William Jackman (7) | July 5, 2021 | RSU | 5,315 | 118,684 | — | — | ||||||||||||||||
General Counsel | August 12, 2021 | PSU | — | — | 304,000 | 6,788,320 |
Option Exercises and Stock Vested Table
The following table presents, for each of the named executive officers, the number of shares of Riot’s common stock underlying the stock options, PSUs and RSUs which vested during 2021, as well as the aggregate value realized upon the exercise of such vested options and the settlement of such vested of PSUs and RSUs.
Option Awards | Stock Awards | |||||||||||||||||||
Type of | Number of Shares Acquired Upon Exercise | Value Realized Upon Exercise (1) | Number of Shares Acquired Upon Vesting | Value Realized Upon Vesting (2) | ||||||||||||||||
Name | Award | (#) | ($) | (#) | ($) | |||||||||||||||
Jason Les | RSU | — | — | 18,750 | 714,625 | |||||||||||||||
Chief Executive Officer | PSU | — | — | 50,000 | 1,806,418 | |||||||||||||||
(Principal Executive Officer) | ||||||||||||||||||||
Jeffrey McGonegal (3) | Option | 12,000 | 294,600 | — | — | |||||||||||||||
Chief Financial Officer | RSU | — | — | 67,447 | 2,219,003 | |||||||||||||||
(Principal Financial Officer) | PSU | — | — | 44,000 | 1,589,468 | |||||||||||||||
Benjamin Yi | RSU | — | — | 17,500 | 581,087 | |||||||||||||||
Executive Chairman | PSU | — | — | 50,000 | 1,806,418 | |||||||||||||||
Megan Brooks | RSU | — | — | 32,269 | 1,661,878 | |||||||||||||||
Chief Operating Officer | PSU | — | — | 39,999 | 1,445,099 | |||||||||||||||
(Former) | ||||||||||||||||||||
William Jackman | RSU | — | — | 5,314 | 127,615 | |||||||||||||||
General Counsel | PSU | — | — | 36,000 | 1,300,620 | |||||||||||||||
Executive Employment Agreements
The Company has entered into employment agreements with, and provides post-employment benefits to, its named executive officers as follows:
Benjamin Yi, Executive Chairman
On May 24, 2021, we entered into an executive employment agreement with Mr. Yi, pursuant to which he has agreed to serve as our Executive Chairman for a three-year term, which renews for successive one-year terms after the expiration of the initial term. As compensation for his services as our Executive Chairman, Mr. Yi will receive a prorated annual base salary of $240,000 in cash, plus ten Bitcoin, and is eligible to receive additional incentive bonuses under the AIP. The Company pays the cash aspect of Mr. Yi’s base salary in accordance with its regular payroll practices, and the Bitcoin aspect of his base salary is paid out on a quarterly basis as of the end of the quarter (each a “Bitcoin payment date”). Mr. Yi was also granted an equity award of 15,000 restricted stock units under and pursuant to the 2019 Equity Plan, which are eligible to vest in four equal quarterly installments following his appointment as Executive Chairman. These restricted stock units are convertible into shares of our common stock on a one-for-one basis following vesting, in accordance with the terms of the applicable equity award agreement. As additional compensation for his services as our Executive Chairman, Mr. Yi is also eligible to receive periodic grants of equity awards, including incentive compensation awards, which will be subject to vesting schedules and other terms and conditions, as set forth in equity award agreements with the Company, to be entered into as of the date of such future awards. Any equity Mr. Yi may receive pursuant to his executive employment agreement will be awarded under the 2019 Equity Plan, as the same may be amended or replaced from time to time during the term of his employment as our Executive Chairman.
During the fiscal year ended December 31, 2020, Mr. Yi served2023.
a) | Identification of Directors: The information required by this Part III, Item 10 with respect to our directors is incorporated herein by reference to the discussion under the heading “Proposal No. 1: Election of Directors—Information Regarding Directors” in our 2024 Proxy Statement. |
b) | Identification of Executive Officers: The information required by this Item with respect to our executive officers is included in Part I of this Annual Report under the heading “Information About Our Executive Officers” in accordance with General Instruction G(3) of Form 10-K. |
c) | Audit Committee Information; Financial Expert: The information required by this Part III, Item 10 with respect to the Audit Committee of our board of directors and “audit committee financial experts” is incorporated herein by reference to the discussion under the heading “Committees of the Board of Directors—Audit Committee” in our 2024 Proxy Statement. |
d) | Delinquent Section 16(a) Reports: The information required by this Item with respect to compliance with Section 16(a) of the Exchange Act is incorporated herein by reference to the discussion under the heading “Delinquent Section 16(a) Reports” in our 2024 Proxy Statement. |
e) | Code of Ethics: All of our directors and employees, including our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, and other senior accounting and financial officers, are required to abide by our Code of Ethics and Business Conduct. Our Code of Ethics and Business Conduct is filed as an exhibit to this Annual Report and is posted on our website at https://www.riotplatforms.com/investors/corporate-governance/governance-documents. We intend to disclose on our website at https://www.riotplatforms.com/investors/corporate-governance/governance-documents any amendment to, or waiver from, our Code of Ethics and Business Conduct that is required to be disclosed to stockholders, within four business days following such amendment or waiver. The information required by this Part III, Item 10 with respect to codes of ethics is incorporated herein by reference to the discussion under the heading “Corporate Governance—Corporate Governance Guidelines, Code of Ethics and Business Conduct, and Committee Charters” in our 2024 Proxy Statement. |
f) | Policy for Nominees: The information required under Item 407(c)(3) of Regulation S-K is incorporated herein by reference to the discussion under the heading “General Information—When are stockholder proposals due for next year’s annual general meeting?” in our 2024 Proxy Statement concerning procedures by which stockholders may recommend nominees to our board of directors. No material changes to those procedures have occurred since the disclosure regarding those procedures in Part II, Item 5 of our Quarterly Report on Form 10-Q for thequarter ended June 30, 2023. |
ITEM 11.EXECUTIVE COMPENSATION
The information required by this Part III, Item 11 will be provided in the section entitled “Executive Compensation” in our 2024 Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Except as an independent director onset forth below regarding securities authorized under our Boardequity compensation plans, the information required to be disclosed by this Part III, Item 12 is incorporated herein by reference from the section entitled “Security Ownership of Certain Beneficial Owners and was not an officerManagement” in our 2024 Proxy Statement.
Securities authorized for issuance under equity compensation plans
In October 2019, the Company’s stockholders approved the 2019 Equity Incentive Plan. The 2019 Equity Incentive Plan authorized the granting of stock-based compensation awards to directors, employees, and consultants in the form of time-based and performance
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based restricted stock awards, restricted stock unit awards, or employeestock options that settled in shares of the Company. As a director, Mr. Yi received equity awardsCompany’s common stock upon vesting. There were 3.6 million shares of 227,642 restrictedcommon stock unitsinitially reserved for issuance under the Company’s 2019 Equity Plan, pursuant to an equity award agreement with the Company, which vest in intervals and are eligible to be settled in accordance withIncentive Plan.
In November 2020, the Company’s regular compensation procedures.
Jason Les, Chief Executive Officer
On February 8, 2021, we entered into an executive employment agreement with Mr. Les, pursuant to which he has agreed to serve as our Chief Executive Officer (principal executive officer) for a five-year term, which renews for successive one-year terms afterstockholders approved the expiration of the initial term. As compensation for his services as our Chief Executive Officer, Mr. Les will receive a prorated annual base salary of $240,000 in cash, plus ten Bitcoin, and is eligible to receive additional incentive bonuses under the AIP, which will be paid in accordance with the Company’s regular payroll practices, with the Bitcoin aspect of his base salary being on the quarterly Bitcoin payment dates. Mr. Les was also awarded an initial equity award of 25,000 restricted stock units under and pursuantFirst Amendment to the 2019 Equity Incentive Plan, which are eligible to vest in four equal quarterly installments onincreased the first day following the end of each fiscal quarter following his appointment as Chief Executive Officer. These restricted stock units are convertible into shares of our common stock on a one-for-one basis following vesting, in accordance with the terms of the applicable equity award agreement As additional compensationreserved for his services as our Chief Executive Officer, Mr. Les is also eligible to receive periodic grants of equity awards, including incentive compensation awards, which will be subject to vesting schedules and other terms and conditions, as set forth in equity award agreements with the Company, to be entered into as of the date of such future awards. Any equity Mr. Les may receive pursuant to his executive employment agreement will be awarded under the 2019 Equity Plan, as the same may be amended or replaced from time to time during the term of his employment as our Chief Executive Officer.issuance by 3.5 million shares.
During the fiscal year ended December 31, 2020, Mr. Les served as an independent director on our Board and was not an officer or employee of the Company. As a director, Mr. Les received equity awards of 288,617 restricted stock units under the Company’s 2019 Equity Plan, pursuant to an equity award agreement with the Company, which vest in intervals and are eligible to be settled in accordance with the Company’s regular compensation procedures.
Jeffrey McGonegal, Chief Financial Officer
On February 8, 2021, we entered into an executive employment agreement with Mr. McGonegal, pursuant to which he has agreed to serve as our Chief Financial Officer (principal financial and accounting officer) for a one-year term to focus on his long-standing position as the Company’s Chief Financial Officer. As our Chief Financial Officer, Mr. McGonegal will be paid an annual base salary of $360,000 and is eligible to receive additional cash incentive bonuses under the AIP, which amounts will be paid in accordance with the Company’s regular payroll practices as compensation for his services as CFO. Upon entry into his current executive employment agreement, Mr. McGonegal was granted an equity award of 20,000 RSUs under the Company’s 2019 Equity Plan, which are eligible to vest in four equal quarterly installments following his appointment as Chief Financial Officer, and which are convertible into shares of our common stock on a one-for-one basis following vesting. Any equity Mr. McGonegal may receive pursuant to his executive employment agreement will be awarded under the Company’s 2019 Equity Plan, as the same may be amended or replaced from time to time during the term of his employment as our Chief Financial Officer.
During the fiscal year ended December 31, 2020, Mr. McGonegal served as our CEO and Chief Financial Officer pursuant to an executive employment agreement, dated as of February 2, 2020, at an annual base salary of $250,000, and was awarded 209,790 RSUs on February 7, 2020 under the Company’s 2019 Equity Plan.
Megan Brooks, Chief Operating Officer (former)
Effective as of April 6, 2021, we entered into an executive employment agreement with Ms. Brooks, pursuant to which she agreed to serve as our Chief Operating Officer for an initial three-year term, which may be renewed for successive one-year terms after the expiration of the initial term. During the initial three-year term of her employment as our Chief Operating Officer, Ms. Brooks was paid an annual base salary of $275,000 and was eligible to receive additional cash incentive bonuses, which was paid in accordance with the Company’s regular payroll practices as compensation for her services as Chief Operating Officer. Upon her appointment as Chief Operating Officer, Ms. Brooks was granted, as additional compensation for her services as our Chief Operating Officer, an initial equity award of 6,000 RSUs under the Company’s 2019 Equity Plan pursuant to an equity award agreement with the Company, which RSUs were eligible to vest in four equal quarterly installments following her appointment as Chief Operating Officer. These RSUs are convertible into shares of our common stock on a one-for-one basis following vesting, in accordance with the terms of the equity award agreement. As additional compensation for her services as our Chief Operating Officer, Ms. Brooks was also eligible to receive periodic equity awards, which are subject to vesting schedules and other terms and conditions, as set forth in equity award agreements with the Company. Any equity Ms. Brooks received pursuant to her executive employment agreement were awarded under the Company’s 2019 Equity Plan.
Prior to her appointment on April 6, 2021 as our Chief Operating Officer, Ms. Brooks served as Riot’s Vice President of Finance, a position to which she had been appointed in fiscal year 2020, at an annual base salary of $175,000, and she received equity awards of 117,073 RSUs under the Company’s 2019 Equity Plan, pursuant to an equity award agreement with the Company, all of which were vested as of December 31, 2021.
On March 21, 2022, we entered into a Separation and Release Agreement (the “Separation Agreement”) with our Chief Operating Officer, Ms. Brooks, regarding her separation from us, effective as of April 7, 2022 (the “Separation Date”), and her provision of certain transition services to us to help facilitate a smooth transition following the cessation of her employment with us from the Separation Date through July 7, 2022, unless earlier terminated as provided in the Separation Agreement (the “Transition Period”). Under applicable law, the Separation Agreement may be revoked for seven days following its execution; therefore, the Separation Agreement will become effective as of March 29, 2022, unless earlier revoked.
The Separation Agreement provides for: (i) a customary waiver and release in favor of the Corporation; (ii) reconfirmation and certain extensions of the obligations under existing agreements pertaining to confidentiality and intellectual property ownership; (iii) the parties’ agreements regarding cooperation following the Separation Date; (iv) the provision of certain transition services to the Corporation and payment of the transition services fees; and (v) upon the Separation Agreement becoming binding and enforceable by its terms, payment of the following amounts as separation benefits: (A) a cash severance payment of $406,250.00, less amounts withheld for applicable taxes, representing 15 months’ base salary, payable in semi-monthly installments commencing July 7, 2022 according to Riot’s ordinary compensation practices; (B) a lump-sum payment as of the Separation Date of $86,370.00, less amounts withheld for applicable taxes, representing the pro-rated portion of the gross annual Incentive Bonus amount for fiscal year 2022 accrued through the Separation Date; (C) continued vesting through the end of the Transition Period of 6,000 time-based RSUs previously granted under the 2019 Equity Plan pursuant to the RSU award agreements dated as of April 7, 2021 and November 5, 2021, with acceleration of the final 1,500 RSUs awarded under the November 5, 2021 RSU award agreement as of July 7, 2022, as permitted under the 2019 Equity Plan and as approved by the Corporation’s Compensation and Human Resources Committee; (D) continued vesting through the end of the Transition Period of the performance-based PSUs previously granted under the 2019 Equity Plan pursuant to the PSU award agreement dated as of August 12, 2021, based on the Corporation’s performance as of the end of Q2 2022 on June 30, 2022; and (E) if continuing coverage under our group medical plan is elected pursuant to the Consolidated Omnibus Budget Reconciliation Act, as amended, (“COBRA”) payment of COBRA premiums until the earlier of 18 months after the Separation Date or the date such coverage commences under a subsequent employer’s medical insurance plan. Further, in consideration of the transition services, we agreed to pay a cash fee of $81,250.00, payable in semi-monthly installments throughout the Transition Period, and grant 75,000 RSUs under the 2019 Equity Plan, which are eligible to vest in three equal tranches as of May 7, 2022, June 7, 2022, and July 7, 2022.
William R. Jackman, General Counsel
Effective July 5, 2021, we entered into an executive employment agreement with Mr. Jackman, pursuant to which he has agreed to serve as our General Counsel for a three-year term, which renews for successive one-year terms after the expiration of the initial term. As our General Counsel, Mr. Jackman will receive a prorated annual base salary of $300,000 and is eligible to receive additional incentive bonuses under the AIP, which will be paid in accordance with the Company’s regular payroll practices as compensation for his services as our General Counsel. Mr. Jackman was also granted an equity award of 10,630 time-based RSUs under and pursuant to the 2019 Equity Plan, which are eligible to vest in four equal quarterly installments following his appointment as General Counsel. These RSUs are convertible into shares of our common stock on a one-for-one basis following vesting, in accordance with the terms of the applicable equity award agreement. As additional compensation for his services as our General Counsel, Mr. Jackman is also eligible to receive periodic grants of equity awards, including incentive compensation awards, which will be subject to vesting schedules and other terms and conditions, as set forth in equity award agreements with the Company, to be entered into as of the date of such future awards. Any equity Mr. Jackman may receive pursuant to his executive employment agreement will be awarded under the 2019 Equity Plan, as the same may be amended or replaced from time to time during the term of his employment as our General Counsel.
Potential Payments Upon Termination or Change in Control
The following table discloses the potential payments upon termination or change in control that would have been received by our named executive officers, had a termination event occurred on December 31, 2021 based on the terms of the applicable employment agreements and equity award agreements that were in effect on that date. The table assumes that any equity awards that vest in connection with the applicable triggering event that are subject to performance conditions are earned at the target level of performance within the applicable period except as may be noted otherwise, and values equity awards based on the closing price of a share of our common stock on December 31, 2021 of $22.33, as reported on the Nasdaq Capital Market. These amounts are estimates only and do not necessarily reflect the actual amounts that would be paid to the named executive officers, which amounts would only be known at the time that he or she becomes entitled to such payment.
Termination Event | ||||||||||||||||||||
Named Executive Officer | Termination For Cause or Without Good Reason | Termination Without Cause or For Good Reason | Death or Disability (2) | Change in Control (Single Trigger) | Change in Control (Double Trigger) (3) | |||||||||||||||
Benefit (1) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||
Jason Les, Chief Executive Officer | ||||||||||||||||||||
Severance | — | 703,065 | 175,766 | — | 703,065 | |||||||||||||||
Restricted Stock Units | — | 6,444,818 | — | — | 6,444,818 | |||||||||||||||
Options | — | — | — | — | — | |||||||||||||||
Total | — | 7,147,882 | — | — | 7,147,882 | |||||||||||||||
Jeffrey McGonegal, Chief Financial Officer | ||||||||||||||||||||
Severance | — | 180,000 | 150,000 | — | 360,000 | |||||||||||||||
Restricted Stock Units | — | 111,650 | 891,075 | — | 111,650 | |||||||||||||||
Options | — | — | — | — | — | |||||||||||||||
Total | — | 291,650 | 1,041,075 | — | 471,650 | |||||||||||||||
Megan Brooks, Chief Operating Officer (former) | ||||||||||||||||||||
Severance | — | 325,000 | 81,250 | — | 325,000 | |||||||||||||||
Restricted Stock Units | — | 66,990 | — | — | 66,990 | |||||||||||||||
Options | — | — | — | — | — | |||||||||||||||
Total | — | 391,990 | — | — | 391,990 | |||||||||||||||
Benjamin Yi, Executive Chairman | ||||||||||||||||||||
Severance | — | 703,065 | 175,766 | — | 703,065 | |||||||||||||||
Restricted Stock Units | — | 5,083,246 | — | — | 5,083,246 | |||||||||||||||
Options | — | — | — | — | — | |||||||||||||||
Total | — | 5,786,310 | — | — | 5,083,246 | |||||||||||||||
William Jackman, General Counsel | ||||||||||||||||||||
Severance | — | 300,000 | 75,000 | — | 300,000 | |||||||||||||||
Restricted Stock Units | — | 118,684 | — | — | 118,684 | |||||||||||||||
Options | — | — | — | — | — | |||||||||||||||
Total | — | 418,684 | — | — | 418,684 | |||||||||||||||
Director Compensation
We pay our non-employee directors a mix of cash and equity compensation, in amounts recommended by the Compensation and Human Resources Committee in consultation with independent compensation consultants the committee engages from time to time to assess the appropriateness of the Board’s compensation package. In recommending changes to the Company’s director compensation package, the Compensation and Human Resources Committee reviews market data provided by independent compensation consultants and considers whether any changes in director compensation are required to enable the Company to retain talented Board members, who, as members of the Board, are responsible for setting the Company’s strategic vision, overseeing its growth and development, and protecting its stockholders’ interests.
Director Compensation Table
The following table shows the total compensation paid or accrued during the year ended December 31, 2021 to each of our directors, current and former, for services as our director:
Name | Fees Earned or Paid in Cash | Stock Awards (1) | Option Awards | Non-Equity Incentive Plan Compensation | Non-Qualified Deferred Compensation Earnings | Total (2) | ||||||||||||||||||
($) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||||||
Benjamin Yi (3) | — | — | — | — | — | — | ||||||||||||||||||
Jason Les (4) | — | — | — | — | — | — | ||||||||||||||||||
Hubert Marleau (5) | 57,000 | 498,250 | — | — | — | 555,250 | ||||||||||||||||||
Hannah Cho (6) | 55,571 | 498,250 | — | — | — | 553,821 | ||||||||||||||||||
Lance D’Ambrosio (7) | 38,129 | 339,125 | — | — | — | 377,254 | ||||||||||||||||||
Pay Ratio Disclosure
Pursuant to Instruction 7 to Regulation S-K Item 402(u), as the Company ceased to be a smaller reporting company as of December 31, 2021, the Company is not required to provide pay ratio disclosure until after its 2022 fiscal year.
The following table sets forth certain information regarding the beneficial ownership of our Common Stock, as of March 31, 2022, for the following:
We have based our calculation of the percentage of beneficial ownership on 117,304,304 shares of our Common Stock issued and outstanding as of March 31, 2022.
We have determined beneficial ownership in accordance with applicable SEC rules and regulations, and thus it represents sole or shared voting or investment power with respect to our securities. Unless otherwise indicated below, to our knowledge, the persons named in the table have sole voting and sole investment power with respect to all shares that they beneficially owned, subject to community property laws where applicable.
Solely for the purpose of computing the number of shares of our Common Stock beneficially owned by a person and the percentage beneficial ownership of our securities of such person for this table in accordance with SEC rules, we have deemed shares underlying convertible securities and other equity rights, including RSUs and PSUs, that are vested and exercisable as of March 31, 2022, or are expected to become vested and exercisable within 60 days of March 31, 2022, to be outstanding and beneficially owned by the holder thereof as of March 31, 2022. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person. In accordance with Exchange Act Rule 13d-3, we have computed the shares deemed beneficially owned by such persons without regard for any net settlement for taxes or other withholdings permitted under the 2019 Equity Plan and approved by the Compensation and Human Resources Committee, and we have excluded from this calculation those shares underlying all outstanding convertible securities and equity rights, including RSUs and PSUs, which are subject to vesting which we do not expect to occur within 60 days of March 31, 2022. As explained under the heading “Performance-Based Restricted Stock Unit Plan” in Item 11 above, PSUs granted under the Performance Plan vest upon the Company’s achievement of Performance Objectives, which is tested following the end of each fiscal quarter during the Performance Period ending December 31, 2023.
Unless otherwise indicated, the beneficial address of each of the persons listed in the table below is c/o: Riot Blockchain, Inc. 3855 Ambrosia Street, Suite 301, Castle Rock, Colorado 80109. The information provided in the table is based on our records, information filed with the SEC and information provided to us, except where otherwise noted.
Name and Address of Beneficial Owner | Number of Shares Beneficially Owned | Percentage of Shares Beneficially Owned | ||||||
5% Shareholders | ||||||||
The Vanguard Group (1) | 10,040,038 | 8.55 | % | |||||
Directors and Named Executive Officers | ||||||||
Hannah Cho, Independent Director (2) | 9,375 | * | ||||||
Hubert Marleau, Independent Director (3) | 5,625 | * | ||||||
Lance D’Ambrosio, Independent Director (4) | 10,625 | * | ||||||
Benjamin Yi, Executive Chairman (5) | 224,696 | * | ||||||
Jason Les, Chief Executive Officer (6) | 468,461 | * | ||||||
Jeffrey McGonegal, Chief Executive Officer (7) | 364,513 | * | ||||||
Megan Brooks, Chief Operating Officer (former) (8) | 127,562 | * | ||||||
William Jackman, General Counsel (9) | 77,446 | * | ||||||
All Directors and Named Executive Officers as a Group (8 Individuals) (10) | 1,288,303 | 1.10 | % | |||||
* Represents beneficial ownership of less than one percent (1.00%).
Securities Authorized for Issuance Under Equity Compensation Plans
The Company currently has one equity compensation plan, The Riot Blockchain, Inc. 2019 Equity Incentive Plan, as amended (the “2019 Plan”). On October 19, 2021, the Company’s stockholders approved the second amendmentSecond Amendment to itsthe 2019 Equity Incentive Plan, which increased the number of shares of the Company’s common stock reserved for issuance by 4,400,0004.4 million shares. The Company currently provides stock-based compensation to employees, directors and consultants, under the 2019 Plan, as approved by
In July 2022, the Company’s stockholders on October 23, 2019, and on November 12, 2020 with respect toapproved the first amendmentThird Amendment to the 2019 Equity Incentive Plan, and on October 19, 2021 with respect towhich increased the second amendmentshares of common stock reserved for issuance by 10.0 million shares.
In June 2023, the Company’s stockholders approved the Fourth Amendment to the 2019 Plan. The Company’s previous 2017 StockEquity Incentive Plan, as amended (the “2017 Plan”), was replacedwhich increased the shares of common stock reserved for issuance by 4.0 million shares.
In December 2023, the Company’s stockholders approved the Fifth Amendment to the 2019 Equity Incentive Plan, withwhich increased the 2017 Plan continuing to govern the then outstanding grants and awards for 12,000 options and 114,103 shares of restricted common stock. No additional grants can be made understock reserved for issuance by 13.0 million shares.
As of December 31, 2023, the 2017 Plan. The Company hashad 18,517,831 shares of common stock reserved 3,554,111 common shares for issuance under the 2019 Equity Incentive Plan.
The following table provides information as of December 31, 2021,2023, about the shares of common stock that may be issued upon the vesting of performance and non-performance based restricted common stock under the 2019 Equity Incentive Plan:
Plan Category | Number of securities to be issued upon exercise of outstanding options and restricted common stock | Weighted average exercise price of outstanding options | Number of securities remaining available for future issuance | |||||||||
Equity compensation plans approved by security holders | 4,182,298 | $ | 31.86 | 3,554,111 | ||||||||
Equity compensation plans not approved by security holders | — | — | — | |||||||||
Total | 4,182,298 | $ | 31.86 | 3,554,111 |
| | | | | | | |
| | Number of |
| | |
| |
| | securities to be | | | | | |
| | issued | | | | | |
| | upon exercise of | | | | | |
| | outstanding | | Weighted | | Number of | |
| | options and | | average exercise | | securities | |
| | restricted | | price of | | remaining | |
| | common | | outstanding | | available for | |
Plan Category | | stock | | options | | future issuance | |
Equity compensation plans approved by security holders | | 401,639 | | $ | - | | 18,517,831 |
Equity compensation plans not approved by security holders | | - | | | - | | - |
Total | | 401,639 | | $ | - | | 18,517,831 |
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Related Person Transaction Policy
The Audit Committee has responsibility for reviewing and, if appropriate, for approving any related party transactions that would beinformation required to be disclosed pursuant to applicable SEC rules. This includes current or proposed transactions in which the Company was or is to be a participant in which the amount involved exceeds the lower of either $120,000 or 1% of the average of the Company’s total assets at year-end for the last two completed fiscal years, and in which any of the Company’s executive officers, Directors, or stockholders (or groups of stockholders) owning more than 5% of the Company’s outstanding common stock, or any immediate family members of such persons (collectively a “Related Party”), has a direct or indirect material interest. Our Audit Committee reviews and approves any transaction with a Related Party we propose to enter into. Our Audit Committee charter details the policies and procedures relating to transactions that may present actual, potential or perceived conflicts of interest and may raise questions as to whether such transactions are consistent with the best interest of our company and our stockholders. Such transactionsby this Part III, Item 13 will be entered into only if found to beprovided in the best interest of the Companysections entitled “Certain Relationships and approvedRelated-Party Transactions” and “Director Independence” in accordance with the Company’s Code of Ethics, whichour 2024 Proxy Statement and is available on the “Investors” page of Company’s website, www.riotblockchain.com, under the “Governance” tab.incorporated herein by reference.
ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES
Since the beginning of the Company’s last fiscal year, no transactions with a Related Party were approvedThe information required by the Audit Committee. Other than the compensation arrangements described underthis Part III, Item 14 will be provided in the section entitled “Executive Compensation”“Fees to Independent Auditors” in our 2024 Proxy Statement and is incorporated herein and standard indemnification agreements with our directors and officers, there were no transactions with a Related Party in which a Related Party had or will have a direct or indirect material interest in the Company.
Director Independence
As discussed under the heading “Director Background and Qualifications” in Part III, Item 10, of this Annual Report, the Board of Directors have affirmatively determined that each of the three members of its three standing committees, Ms. Hannah Cho, Mr. Hubert Marleau, and Mr. Lance D’Ambrosio, are each deemed “independent” (as that term is defined under the applicable rules and regulations of the SEC and the Nasdaq Rules, including the additional Audit Committee member and Compensation and Human Resources Committee member independence standards set forth in the Nasdaq continued listing standards)by reference.
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The Audit Committee Charter, which sets forth the rules adopted by the Board governing the conduct, role and responsibilitiesTable of the Audit Committee, currently requires the Audit Committee to review and pre-approve all audit and permissible non-audit services to be provided to the Company, whether provided by the Company’s independent auditors or other firms, an all other services (review, attestation and non-audit services) to be provided to the Company, the Audit Committee, or the Board, by the Company’s independent registered public accounting firm, other than de minimis non-audit services approved in accordance with applicable SEC rules. All of the services performed by the independent registered public accounting firm were approved by the Company’s Audit Committee and prior to performance. The Audit Committee has determined that the payments made to its independent accountants for these services are compatible with maintaining such auditors’ independence.Contents
Aggregate fees billed or expected to be billed for professional services for the years ended December 31, 2021 and 2020 in the following categories and amounts were:
2021 | 2020 | |||||||
Audit Fees (1) | $ | 831,025 | $ | 413,545 | ||||
Audit-Related Fees | — | — | ||||||
Tax Fees (2) | 55,220 | 47,250 | ||||||
All Other Fees | — | — | ||||||
Total Fees | $ | 886,245 | $ | 460,795 |
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.SCHEDULES
We have filed the following documents as part of this Annual Report on Form 10-K/A for the fiscal year ended December 31, 2021:
Report:
1. | Consolidated |
2. | Financial |
All schedules are omitted because they are not applicable, not required, or the information has been otherwise included in the Consolidated Financial Statements or Notes to Consolidated Financial Statements.
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| | | |
---|---|---|---|
| | | |
Exhibit | Description | | Location* |
101 | Inline XBRL | | Filed herewith. |
| | | |
104 | Cover Page Interactive Data File | ||
| Filed herewith. | ||
| | | |
* |
| ||
† |
| ||
+ |
| ||
_____________________
* Filed herewith.
† Portions of this exhibit have been omitted as confidential information.
ITEM 16. FORM 10-K/A SUMMARY.10-K SUMMARY
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this reportAnnual Report on Form 10-K to be signed on its behalf on November 23, 2022, by the undersigned thereunto duly authorized.
|
|
Date: February 22, 2024 | RIOT PLATFORMS, INC. |
| |
| /s/ Jason Les |
| Jason Les,
(principal executive officer and duly authorized officer) |
| |
| |
/s/ Colin Yee | |
| Colin Yee, Chief Financial Officer |
(principal financial officer and duly authorized officer) |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jason Les and Colin Yee, each and individually, as his or her true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, for them and in their name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report, on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and generally to do all such things in their names and behalf in their capacities as officers and directors to enable the Company to comply with the provisions of the Securities Exchange Act of 1934 and all requirements of the Securities and Exchange Commission, granting unto each said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, ratifying and confirming all that said attorney-in-fact and agent, or their or his or her substitutes or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant on November 23, 2022February 22, 2024, in the capacities indicated.
| |
| /s/ Jason Les |
| Jason Les
|
| |
| /s/ Colin Yee |
| Colin Yee
|
| |
| /s/ Ryan Werner |
| Ryan Werner |
| |
| /s/ Benjamin Yi |
| Benjamin Yi, Director & |
| |
| /s/ Hannah Cho |
| Hannah Cho, Director |
| |
| /s/ Lance D’Ambrosio |
| Lance D’Ambrosio, Director |
| |
| /s/ Hubert Marleau |
| Hubert Marleau, Director |
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