UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20172022
OR
☐ TRANSITION REPORT PURSUANT TOUNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to __________
Commission file number: 001-33675
| Riot Blockchain, Inc. | ||||
| (Exact name of registrant as specified in its charter) |
| Nevada | 84-1553387 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
3855 Ambrosia Street, Suite 301, Castle Rock, CO 80109 | ||
| (Address of principal executive offices) (Zip Code) | ||
| (303) 794-2000 | ||
| ( | ||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class: | Trading Symbol(s): | Name of each exchange on which registered: | ||
| Common Stock, no par value per share | RIOT | Nasdaq Capital Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitionsdefinition of "large“large accelerated filer," "accelerated filer"” “accelerated filer,” “smaller reporting company” and "smaller reporting company"“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of no parno-par value common stock outstanding as of November 13, 20174, 2022 was 8,321,137.167,296,911.
RIOT BLOCKCHAIN, INC.
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RIOT BLOCKCHAIN, INC.
As used in this Quarterly Report on Form 10-Q (this “Quarterly Report”), the terms “we,” “us,” “our,” the “Company,” the “Registrant,” “Riot Blockchain, Inc.,” and “Riot” mean Riot Blockchain, Inc. and its consolidated subsidiaries, unless otherwise indicated.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report and the documents incorporated by reference herein contain forward-looking statements that involve risks and uncertainties, including those discussed under the heading “Risk Factors” in Management'sthis Quarterly Report and under similar headings in the other filings we make with the U.S. Securities and Exchange Commission (the “SEC”), and are based on management’s assumptions and beliefs about the future that may not materialize or prove to be correct, which could cause our results to differ materially from those expressed in or implied by such forward-looking statements. All statements contained in this Quarterly Report and the documents incorporated by reference herein other than statements of historical fact, such as those set forth under Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,Operations” of this Quarterly Report, are statements that could be deemed forward-looking statements. Such forward-looking statements withinmay include, without limitation, statements concerning: our plans, strategies and objectives for future operations; new equipment, systems, technologies, services or developments, such as our investment in our development and implementation of industrial-scale immersion-cooled Bitcoin mining hardware and our planned one gigawatt data center development in Corsicana, Texas; future economic conditions, performance or outlook; future political conditions; the meaningoutcome of contingencies; potential acquisitions or divestitures; the number and value of Bitcoin rewards we earn from our mining operations; expected cash flows or capital expenditures; our beliefs or expectations; activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future; and our assumptions and beliefs underlying or based upon any of the foregoing. Forward-looking statements are made in reliance on the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) and the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by their use of forward-looking terminology, such as “believes,” “expects,” “may,” “should,” “would,” “will,” “intends,” “plans,” “estimates,” “anticipates,” “projects,” or the negative of these words, and similar words or expressions. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking, and you should consider any statement contained in this Quarterly Report or the documents incorporated by reference herein other, than statements of historical fact, to be a “forward-looking statement” within the meaning of this cautionary note. You should not place undue reliance on these forward-looking statements, which reflect our management’s opinions only as of the date such statements are made and are not guarantees of future performance or actual results. The following are some of the risks, factors and uncertainties which we believe could cause our actual results to differ materially from our historical results or our current expectations or projections expressed in or underlying such forward-looking statements:
• our strategic decision to concentrate on Bitcoin mining ties the success of our business to the success of Bitcoin;
• our Bitcoin mining operations are capital-intensive and can only be successful if our mining costs are lower than the value of the Bitcoin we mine, which has historically been subject to significant price volatility; therefore, our ability to make accurate projections about our business and future contingencies is significantly impaired as a result of this price volatility and other risks that lie largely outside of our control, such as our suppliers’ inability to perform or timely deliver new miners, parts, or services we purchase from them, as well as other risks we may not anticipate;
• our Bitcoin mining operations are subject to unique industry risks outside of our control that could have material adverse effects on our business, including, among others: our need for significant amounts of low-cost and reliable electricity; changes to laws and regulations pertaining to mining, transacting in, or holding Bitcoin; the safe harbor created thereby. These statements relatehistorical volatility in the demand for, and the price of, Bitcoin; changes in the public perception of Bitcoin; our need for consistent, high-speed, and highly secure Internet connectivity; intense competition for new miners and the necessary infrastructure, personnel, material and components to future events or the Company's future financial performancesupport industrial-scale Bitcoin mining operations; cybersecurity risks; increased global Bitcoin network hash rate and involve knowndifficulty; and unknowncompetition for a fixed supply of Bitcoin rewards;
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• we have made significant investments in our development of industrial-scale immersion-cooled Bitcoin mining infrastructure, which is subject to unique risks and uncertainties, and if we are unable to effectively implement this innovative technology because of these risks or other factors, we may not realize the benefits we anticipate from our substantial investment in immersion-cooled Bitcoin mining on the schedule we anticipate, if at all;
• our Bitcoin mining operations are concentrated in discrete locations, and a natural disaster, unforeseen environmental issues, or other significant disruption affecting our facilities could severely impact our ability to operate, which could have a material adverse effect on our business, results of operations, financial condition, and the market price of our securities;
• we cannot predict the consequences of future geo-political events, such as international conflict and related sanctions, COVID-19 and the ongoing global supply chain crisis that has resulted, to our business, our suppliers, and the markets in which we operate, which significantly impairs our ability to make accurate projections of future revenues, costs, and risks, and we may be unable to properly insure against these risks as a result;
• the growing public awareness of climate change and the negative media attention given to the energy consumption of proof-of-work cryptography may lead to the implementation of new taxes, laws and regulations affecting our access to energy, a decline in the demand for new Bitcoin, or other factors that could have a material adverse effect on our business, results of operations, and the market price of our securities, regardless of our efforts to control the climate impact of our operations;
• we may causebe required to record a significant charge to earnings if the actualvalue of our amortizable intangible assets, or Bitcoin holdings become impaired due to a change in circumstances indicating that the carrying value of these assets may not be recoverable, such as a sustained decline in the value of a Bitcoin from the value recorded when we mined it, a decline in our stock price and market capitalization, reduced future cash flow estimates, and other changes to our industry and the macroeconomic environment in which we operate;
• we have made, and expect to continue to make, strategic acquisitions and investments, including our recent decision to develop a second large-scale Bitcoin mining and data center facility in Corsicana, Texas, which entail significant risks and uncertainties that could adversely affect our business, results levels of activity, performanceoperations, and financial condition, such as unforeseen difficulties in integrating the operations of an acquired business into our own, and we may fail to realize the anticipated benefits of these acquisitions on the schedule we expect, if at all;
• we expect to need to raise additional capital, in the form of equity or achievementsdebt, to fund our business objectives, goals, and strategies; however, volatility in the trading price of shares of our common stock, the number of authorized shares available for issuance and the price of Bitcoin may jeopardize our ability to raise the necessary additional capital;
• we could be negatively impacted by a security breach, through cyber-attack, cyber-intrusion, insider threats or otherwise, or other significant disruption of our information technology networks and related systems;
• global macroeconomic conditions have given rise to significantly increased competition for labor, and we may be unable to hire the qualified and talented personnel we need for our operations and to carry out our business strategy, or to retain our workforce without substantially increasing our compensation and other benefits, which could increase our operating costs significantly;
• our reputation and ability to do business may be impacted by the improper conduct of our employees, agents or business partners; and
• the outcome of litigation and other disputes in which we are involved from time to time is unpredictable, and an adverse decision in any such matter could have a material adverse effect on our financial condition, results of operations, cash flows and equity.
| iii |
Additional details and discussions concerning some of the Company or its industryvarious risks, factors and uncertainties that could cause future results to bediffer materially different from those expressed or implied by any forward-looking statements. In some cases,in our forward-looking statements can be identified by terminology such as "may," "will," "could," "would," "should," "expect," "plan," "anticipate," "intend," "believe," "estimate," "predict," "potential" or other comparable terminology. Please seeare set forth under the "Risk Factors"heading “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item 1A of the Company'sour Annual Report on Form 10-K for the year ended December 31, 20162021, as amended (the “2021 Annual Report”), as well as those which may be disclosed in current reports on Form 8-K and other subsequent filings we make with the SEC. The foregoing list of factors and the factors set forth under the heading “Risk Factors” included in our 2021 Annual Report, this Quarterly Report, and the other filings we make with the SEC are not exhaustive. Additional risks and uncertainties not known to us or that we currently believe not to be material may adversely impact our business, financial condition, results of operations and cash flows. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Should any risks or uncertainties develop into actual events, these developments could have a discussionmaterial adverse effect on our business, financial condition, results of certain important factorsoperations and cash flows.
Accordingly, you should read this Quarterly Report completely and with the understanding that relate toour actual future results may be materially different from our historical results and also from those expressed in or implied by the forward-looking statements contained in this report. AlthoughQuarterly Report and the Company believes that the expectations reflected in thesedocuments incorporated by reference herein. The forward-looking statements contained in this Quarterly Report and the documents incorporated by reference herein speak only as of the date they are reasonable, it can give no assurance that such expectations will prove to be correct. Unlessmade and, unless otherwise required by applicable securities laws, the Company disclaimswe disclaim any intention or obligation to update or revise any such forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.
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PART I —- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Riot Blockchain, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except for share and per share amounts)
September 30, 2017 | December 31, 2016 | |||||||
| (Unaudited) | (Reclassified) | |||||||
| ASSETS | ||||||||
| Current assets (Note 1): | ||||||||
| Cash and cash equivalents | $ | 13,139,722 | $ | 5,529,848 | ||||
| Short-term investments | - | 7,506,761 | ||||||
| Prepaid expenses and other current assets | 295,059 | 219,991 | ||||||
| Current assets of discontinued operations (Note 9) | 11,532 | 486,890 | ||||||
| Total current assets | 13,446,313 | 13,743,490 | ||||||
| Property and equipment, net (Note 3) | 4,113 | 5,538 | ||||||
| Investment in Coinsquare (Note 2) | 3,000,000 | - | ||||||
| Other long term assets, net (Note 4) | 899,319 | 938,038 | ||||||
| Noncurrent assets of discontinued operations (Note 9) | - | 2,353,749 | ||||||
| Total assets | $ | 17,349,745 | $ | 17,040,815 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 248,820 | $ | 253,817 | ||||
| Accrued compensation | 4,659 | 1,520 | ||||||
| Accrued expenses | 122,990 | 304,675 | ||||||
| Notes and other obligations, current portion (Note 5) | 215,712 | 139,611 | ||||||
| Deferred revenue, current portion (Note 8) | 96,698 | 96,698 | ||||||
| Current liabilities of discontinued operations (Note 9) | 202,080 | 258,819 | ||||||
| Total current liabilities | 890,959 | 1,055,140 | ||||||
| Deferred revenue, less current portion (Note 8) | 992,792 | 1,065,316 | ||||||
| Total liabilities | 1,883,751 | 2,120,456 | ||||||
| Commitments and contingencies (Notes 6, 8 and 10) | ||||||||
| Stockholders' equity (Notes 6 and 7): | ||||||||
| Preferred Stock, no par value, 15,000,000 (2017) and 0 (2016) shares authorized; 2,000,000 (2017) and 0 (2016) shares designated as 2% Series A Convertible Stock, 19,194.72 shares issued and outstanding (2017) | 4,798,671 | - | ||||||
| Common stock, no par value, 170,000,000 (2017) and 60,000,000 (2016) shares authorized; shares issued and outstanding 5,447,792 (2017) and 4,503,971 (2016) | 131,490,219 | 124,775,635 | ||||||
| Accumulated deficit | (120,822,896 | ) | (109,855,276 | ) | ||||
| Total stockholders’ equity | 15,465,994 | 14,920,359 | ||||||
| Total liabilities and stockholders' equity | $ | 17,349,745 | $ | 17,040,815 | ||||
| September 30, 2022 | December 31, 2021 | |||||||
| ASSETS | (Unaudited) | |||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 254,974 | $ | 312,315 | ||||
| Accounts receivable | 17,385 | 15,398 | ||||||
| Costs and estimated earnings in excess of billings | 15,119 | 9,862 | ||||||
| Prepaid expenses and other current assets | 22,100 | 7,135 | ||||||
| Bitcoin | 125,151 | 159,544 | ||||||
| Future power credits, current portion | 39,996 | 58,481 | ||||||
| Investments in marketable equity securities, at fair value | 2,170 | 10,804 | ||||||
| Total current assets | 476,895 | 573,539 | ||||||
| Property and equipment, net | 650,191 | 276,480 | ||||||
| Deposits | 178,502 | 266,170 | ||||||
| Intangible assets, net | 13,017 | 14,162 | ||||||
| Goodwill | — | 335,563 | ||||||
| Derivative asset | 112,944 | 26,079 | ||||||
| Right of use assets | 21,763 | 13,189 | ||||||
| Future power credits, less current portion | — | 25,447 | ||||||
| Other long-term assets | 310 | 310 | ||||||
| Total assets | $ | 1,453,622 | $ | 1,530,939 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 12,664 | $ | 20,037 | ||||
| Billings in excess of costs and estimated earnings | 11,229 | 5,264 | ||||||
| Accrued compensation | 5,190 | 5,927 | ||||||
| Accrued expenses | 33,725 | 16,144 | ||||||
| Deferred revenue, current portion | 2,555 | 2,843 | ||||||
| Contingent consideration liability - future power credits, current portion | 39,996 | 58,481 | ||||||
| Operating lease liability, current portion | 1,699 | 1,182 | ||||||
| Total current liabilities | 107,058 | 109,878 | ||||||
| Deferred revenue, less current portion | 18,364 | 19,796 | ||||||
| Operating lease liability, less current portion | 20,510 | 12,257 | ||||||
| Contingent consideration liability - future power credits, less current portion | — | 25,447 | ||||||
| Other long-term liabilities | 8,319 | 6,241 | ||||||
| Total liabilities | 154,251 | 173,619 | ||||||
| Commitments and contingencies - Note 16 | ||||||||
| Stockholders' equity | ||||||||
| Preferred stock, no par value, 15,000,000 shares authorized: | ||||||||
| 2% Series A Convertible stock, 2,000,000 shares authorized; no shares issued and outstanding as of September 30, 2022 and December 31, 2021 | — | — | ||||||
| 0% Series B Convertible stock, 1,750,001 shares authorized; no shares issued and outstanding as of September 30, 2022 and 2,199 shares issued and outstanding as of December 31, 2021, liquidation preference over common stock, equal to carrying value | — | 11 | ||||||
| Common stock, no par value; 170,000,000 shares authorized; 167,296,912 and 116,748,472 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively | 1,890,983 | 1,595,147 | ||||||
| Accumulated deficit | (591,612 | ) | (237,838 | ) | ||||
| Total stockholders' equity | 1,299,371 | 1,357,320 | ||||||
| Total liabilities and stockholders' equity | $ | 1,453,622 | $ | 1,530,939 | ||||
See Accompanyingthe accompanying Notes to UnauditedCondensed Consolidated Financial Statements,
which are an integral part of these Condensed Consolidated Financial Statements.
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Riot Blockchain, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except for share and Nine Months Ended September 30,per share amounts)
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Other revenue – fee (Note 8) | $ | 24,175 | $ | 24,175 | $ | 72,524 | $ | 72,524 | ||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative | 597,018 | 1,480,141 | 2,694,211 | 3,333,102 | ||||||||||||
| Research and development | 17,658 | 52,963 | 63,008 | 498,634 | ||||||||||||
| Total operating expenses | 614,676 | 1,533,104 | 2,757,219 | 3,831,736 | ||||||||||||
| Operating loss from continuing operations | (590,501 | ) | (1,508,929 | ) | (2,684,695 | ) | (3,759,212 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Gain on property and equipment sale (Note 3) | - | 13,062 | - | 1,933,335 | ||||||||||||
| Interest expense | (4,773,397 | ) | (2,384 | ) | (4,802,296 | ) | (28,130 | ) | ||||||||
| Investment income | 30,903 | 23,639 | 83,247 | 103,031 | ||||||||||||
| Total other income (expense) | (4,742,494 | ) | 34,317 | (4,719,049 | ) | 2,008,236 | ||||||||||
| Loss from continuing operations | (5,332,995 | ) | (1,474,612 | ) | (7,403,744 | ) | (1,750,976 | ) | ||||||||
| Discontinued operations (Note 9): | ||||||||||||||||
| Income (loss) from operations | 30,922 | (236,473 | ) | (944,557 | ) | (236,473 | ) | |||||||||
| Escrow forfeiture gain (Note 6) | - | - | 134,812 | - | ||||||||||||
| Impairment (loss) | - | - | (2,754,131 | ) | - | |||||||||||
| Total income (loss) from discontinued operations | 30,922 | (236,473 | ) | (3,563,876 | ) | (236,473 | ) | |||||||||
| Net loss | $ | (5,302,073 | ) | $ | (1,711,085 | ) | $ | (10,967,620 | ) | $ | (1,987,449 | ) | ||||
| Basic and diluted net income (loss) per share (Note 1) | ||||||||||||||||
| Continuing operations | $ | (0.99 | ) | $ | (0.37 | ) | $ | (1.47 | ) | $ | (0.45 | ) | ||||
| Discontinued operations | 0.01 | (0.06 | ) | (0.71 | ) | (0.06 | ) | |||||||||
| Basic and diluted net loss per share (Note 1) | $ | (0.98 | ) | $ | (0.43 | ) | $ | (2.18 | ) | $ | (0.51 | ) | ||||
| Basic and diluted weighted average number of shares outstanding (Note 1) | 5,401,552 | 3,999,637 | 5,037,764 | 3,918,151 | ||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue, net: | ||||||||||||||||
| Mining | $ | 22,070 | $ | 53,590 | $ | 126,166 | $ | 108,213 | ||||||||
| Data Center Hosting | 8,371 | 11,193 | 27,899 | 14,067 | ||||||||||||
| Engineering | 15,824 | — | 44,886 | — | ||||||||||||
| Other revenue | 25 | 25 | 73 | 73 | ||||||||||||
| Total revenue | 46,290 | 64,808 | 199,024 | 122,353 | ||||||||||||
| Costs and expenses: | ||||||||||||||||
| Cost of revenues (exclusive of depreciation and amortization shown below): | ||||||||||||||||
| Mining | 14,677 | 13,034 | 51,766 | 29,893 | ||||||||||||
| Data Center Hosting | 14,223 | 12,581 | 44,392 | 16,317 | ||||||||||||
| Engineering | 13,780 | — | 40,504 | — | ||||||||||||
| Acquisition-related costs | — | 552 | 78 | 18,894 | ||||||||||||
| Selling, general and administrative | 16,004 | 40,307 | 37,549 | 47,971 | ||||||||||||
| Depreciation and amortization | 26,559 | 12,207 | 61,366 | 20,791 | ||||||||||||
| Change in fair value of derivative asset | 17,749 | (7,413 | ) | (86,865 | ) | (23,806 | ) | |||||||||
| Power curtailment credits | (13,070 | ) | (2,507 | ) | (21,328 | ) | (3,650 | ) | ||||||||
| Change in fair value of contingent consideration | — | 259 | 176 | 444 | ||||||||||||
| Realized gain on sale/exchange of Bitcoin | (1,854 | ) | (65 | ) | (25,443 | ) | (94 | ) | ||||||||
| Gain on exchange of equipment | (7,667 | ) | — | (16,281 | ) | — | ||||||||||
| Impairment of Bitcoin | 5,900 | — | 132,077 | 17,507 | ||||||||||||
| Impairment of goodwill | — | — | 335,648 | — | ||||||||||||
| Total costs and expenses | 86,301 | 68,955 | 553,639 | 124,267 | ||||||||||||
| Operating income (loss) | (40,011 | ) | (4,147 | ) | (354,615 | ) | (1,914 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest income (expense) | 348 | 40 | (9 | ) | 295 | |||||||||||
| Realized loss on sale of marketable equity securities | — | — | (1,624 | ) | ||||||||||||
| Realized gain on sale/exchange of long-term investment | — | — | — | 26,260 | ||||||||||||
| Unrealized gain (loss) on marketable equity securities | 142 | (11,151 | ) | (6,306 | ) | (10,812 | ) | |||||||||
| Other income (expense) | — | (85 | ) | (59 | ) | 1,425 | ||||||||||
| Total other income (expense) | 490 | (11,196 | ) | (7,998 | ) | 17,168 | ||||||||||
| Net income (loss) before taxes | (39,521 | ) | (15,343 | ) | (362,613 | ) | 15,254 | |||||||||
| Current income tax benefit (expense) | (89 | ) | — | (828 | ) | — | ||||||||||
| Deferred income tax benefit (expense) | 3,041 | — | 9,667 | (3,730 | ) | |||||||||||
| Total income tax benefit (expense) | 2,952 | — | 8,839 | (3,730 | ) | |||||||||||
| Net income (loss) | $ | (36,569 | ) | $ | (15,343 | ) | $ | (353,774 | ) | $ | 11,524 | |||||
| Basic net income (loss) per share | $ | (0.24 | ) | $ | (0.16 | ) | $ | (2.64 | ) | $ | 0.13 | |||||
| Diluted net income (loss) per share | $ | (0.24 | ) | $ | (0.16 | ) | $ | (2.64 | ) | $ | 0.13 | |||||
| Basic weighted average number of shares outstanding | 153,895,123 | 96,064,036 | 133,894,338 | 89,350,180 | ||||||||||||
| Diluted weighted average number of shares outstanding | 153,895,123 | 96,064,036 | 133,894,338 | 89,896,374 | ||||||||||||
See Accompanyingthe accompanying Notes to UnauditedCondensed Consolidated Financial Statements,
which are an integral part of these Condensed Consolidated Financial Statements.
| 2 |
Riot Blockchain, Inc. and Subsidiaries
Condensed Consolidated StatementStatements of Stockholders’ Equity
(in thousands, except for share and per share amounts)
(Unaudited)
Three Months Ended September 30, 2022
| Total | ||||||||||||||||||||||||
| Preferred Stock | Common Stock | Accumulated | stockholders' | |||||||||||||||||||||
| Shares | Amount | Shares | Amount | deficit | equity | |||||||||||||||||||
| Balance as of July 1, 2022 | — | $ | — | 147,986,173 | $ | 1,857,108 | $ | (555,043 | ) | $ | 1,302,065 | |||||||||||||
| Delivery of common stock underlying restricted stock units, net of shares settled for tax withholding settlement | — | — | 330,279 | (1,058 | ) | — | (1,058 | ) | ||||||||||||||||
| Issuance of restricted stock | — | — | 12,487,665 | — | — | — | ||||||||||||||||||
| Issuance of common stock/At-the-market offering, net of offering costs | — | — | 6,492,795 | 31,372 | — | 31,372 | ||||||||||||||||||
| Stock-based compensation | — | — | — | 3,561 | — | 3,561 | ||||||||||||||||||
| Net loss | — | — | — | — | (36,569 | ) | (36,569 | ) | ||||||||||||||||
| Balance as of September 30, 2022 | — | $ | — | 167,296,912 | $ | 1,890,983 | $ | (591,612 | ) | $ | 1,299,371 | |||||||||||||
Three Months Ended September 30, 2021
| Total | ||||||||||||||||||||||||
| Preferred Stock | Common Stock | Accumulated | stockholders' | |||||||||||||||||||||
| Shares | Amount | Shares | Amount | deficit | equity | |||||||||||||||||||
| Balance as of July 1, 2021 | 2,199 | $ | 11 | 95,948,232 | $ | 917,197 | $ | (203,045 | ) | $ | 714,163 | |||||||||||||
| Delivery of common stock underlying restricted stock units, net of shares settled for tax withholding settlement | — | — | 30,367 | (475 | ) | — | (475 | ) | ||||||||||||||||
Issuance of common stock/At-the-market offering, net of offering costs | — | — | 1,227,991 | 34,790 | — | 34,790 | ||||||||||||||||||
| Issuance of common stock warrant for settlement of advisory fees | — | — | — | 1,157 | — | 1,157 | ||||||||||||||||||
| Stock-based compensation | — | — | — | 36,023 | 36,023 | |||||||||||||||||||
| Net loss | — | — | — | — | (15,343 | ) | (15,343 | ) | ||||||||||||||||
| Balance as of September 30, 2021 | 2,199 | $ | 11 | 97,206,590 | $ | 988,692 | $ | (218,388 | ) | $ | 770,315 | |||||||||||||
See the accompanying Notes to Condensed Consolidated Financial Statements,
which are an integral part of these Condensed Consolidated Financial Statements.
| 3 |
Riot Blockchain, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except for share and per share amounts)
(Unaudited)
Nine Months Ended September 30, 20172022
| Total | ||||||||||||||||||||||||
| Preferred Stock | Common Stock | Accumulated | stockholders' | |||||||||||||||||||||
| Shares | Amount | Shares | Amount | deficit | equity | |||||||||||||||||||
| Balance as of January 1, 2022 | 2,199 | $ | 11 | 116,748,472 | $ | 1,595,147 | $ | (237,838 | ) | $ | 1,357,320 | |||||||||||||
| Delivery of common stock underlying restricted stock units, net of shares settled for tax withholding settlement | — | — | 1,005,964 | (9,873 | ) | — | (9,873 | ) | ||||||||||||||||
| Issuance of restricted stock | — | — | 12,487,665 | — | — | — | ||||||||||||||||||
| Issuance of common stock/At-the-market offering, net of offering costs | — | — | 37,052,612 | 298,394 | — | 298,394 | ||||||||||||||||||
| Conversion of preferred stock to common stock | (2,199 | ) | (11 | ) | 2,199 | 11 | — | — | ||||||||||||||||
| Stock-based compensation | — | — | — | 7,304 | — | 7,304 | ||||||||||||||||||
| Net loss | — | — | — | — | (353,774 | ) | (353,774 | ) | ||||||||||||||||
| Balance as of September 30, 2022 | — | $ | — | 167,296,912 | $ | 1,890,983 | $ | (591,612 | ) | $ | 1,299,371 | |||||||||||||
| Preferred Stock | Common Stock | Accumulated | ||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Deficit | Total | |||||||||||||||||||
| Balance, January 1, 2017 | — | $ | — | 4,503,971 | $ | 124,775,635 | $ | (109,855,276 | ) | $ | 14,920,359 | |||||||||||||
| Private placement of Common Stock (Note 6) | — | — | 900,000 | 1,913,509 | — | 1,913,509 | ||||||||||||||||||
| Common Shares in escrow forfeited and retired (Note 6) | — | — | (32,801 | ) | (134,812 | ) | — | (134,812 | ) | |||||||||||||||
| Equity rights redemption (Note 6) | — | — | — | (291,995 | ) | — | (291,995 | ) | ||||||||||||||||
| Discount on Convertible Debt arising from values of (Note 6): | ||||||||||||||||||||||||
| Warrants | — | — | — | 2,325,151 | — | 2,325,151 | ||||||||||||||||||
| Beneficial conversion feature | — | — | — | 2,424,849 | — | 2,424,849 | ||||||||||||||||||
| Preferred Stock issued upon Notes payable conversion (Note 6) | 19,194.72 | 4,798,671 | — | — | — | 4,798,671 | ||||||||||||||||||
| Exercise of stock options | — | — | 34,000 | 98,260 | — | 98,260 | ||||||||||||||||||
| Stock-based compensation issued for services | — | — | 42,622 | 379,622 | — | 379,622 | ||||||||||||||||||
| Net loss for the period | — | — | — | — | (10,967,620 | ) | (10,967,620 | ) | ||||||||||||||||
| Balance, September 30, 2017 | 19,194.72 | $ | 4,798,671 | 5,447,792 | $ | 131,490,219 | $ | (120,822,896 | ) | $ | 15,465,994 | |||||||||||||
Nine Months Ended September 30, 2021
| Total | ||||||||||||||||||||||||
| Preferred Stock | Common Stock | Accumulated | stockholders' | |||||||||||||||||||||
| Shares | Amount | Shares | Amount | deficit | equity | |||||||||||||||||||
| Balance as of January 1, 2021 | 4,199 | $ | 22 | 78,523,517 | $ | 506,961 | $ | (229,912 | ) | $ | 277,071 | |||||||||||||
| Delivery of common stock underlying restricted stock units, net of shares settled for tax withholding settlement | — | — | 260,271 | (1,794 | ) | — | (1,794 | ) | ||||||||||||||||
| Issuance of common stock related to exercise of warrants | — | — | 415,657 | 806 | — | 806 | ||||||||||||||||||
| Issuance of common stock for settlement of 1,257,235 warrants on a cashless basis | — | — | 543,686 | — | — | — | ||||||||||||||||||
| Issuance of common stock in connection with the acquisition of Whinstone | — | — | 11,800,000 | 326,152 | — | 326,152 | ||||||||||||||||||
Issuance of common stock/At-the-market offering, net of offering costs | — | — | 5,661,459 | 117,471 | — | 117,471 | ||||||||||||||||||
| Issuance of common stock warrant for settlement of advisory fees | — | — | — | 1,157 | — | 1,157 | ||||||||||||||||||
| Conversion of preferred stock to common stock | (2,000 | ) | (11 | ) | 2,000 | 11 | — | — | ||||||||||||||||
| Stock-based compensation | — | — | — | 37,928 | — | 37,928 | ||||||||||||||||||
| Net income | — | — | — | — | 11,524 | 11,524 | ||||||||||||||||||
| Balance as of September 30, 2021 | 2,199 | $ | 11 | 97,206,590 | $ | 988,692 | $ | (218,388 | ) | $ | 770,315 | |||||||||||||
See Accompanyingthe accompanying Notes to UnauditedCondensed Consolidated Financial Statements,
which are an integral part of these Condensed Consolidated Financial Statements.
| 4 |
Riot Blockchain, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
| 2017 | 2016 | |||||||
| Cash flows from operating activities: | ||||||||
| Continuing operations: | ||||||||
| Net (loss) | $ | (10,967,620 | ) | $ | (1,987,449 | ) | ||
| (Loss) from discontinued operations | (3,563,876 | ) | (236,473 | ) | ||||
| (Loss) from continuing operations | (7,403,744 | ) | (1,750,976 | ) | ||||
| Adjustments to reconcile net loss from continuing operations to net cash used | ||||||||
| in operating activities of continuing operations: | ||||||||
| Amortization of discount on convertible debt | 4,750,000 | - | ||||||
| Stock-based compensation for services | 379,622 | 368,459 | ||||||
| Depreciation and amortization | 55,899 | 74,098 | ||||||
| Amortization of license fees | (72,524 | ) | (72,524 | ) | ||||
| Other non-cash (credits) charges | - | 200,108 | ||||||
| Gain on sale of property and equipment | - | (1,933,335 | ) | |||||
Change in: | ||||||||
| Prepaid expenses and other current assets | 192,071 | 222,474 | ||||||
| Accounts payable | (4,997 | ) | (483,410 | ) | ||||
| Accrued compensation | 3,139 | (120,775 | ) | |||||
| Accrued expenses | (133,014 | ) | 30,042 | |||||
| Net cash (used in) operating activities of continuing operations | (2,233,548 | ) | (3,465,839 | ) | ||||
| Net cash (used in) operating activities of discontinued operations | (930,323 | ) | (375,228 | ) | ||||
| Net cash (used in) operating activities | (3,163,871 | ) | (3,841,067 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Continuing operations: | ||||||||
| Purchases of short-term investments | - | (13,818,949 | ) | |||||
| Proceeds from sales of short-term investments | 7,506,761 | 16,522,853 | ||||||
| Investment in Coinsquare | (3,000,000 | ) | - | |||||
| Proceeds from sale of property and equipment | - | 1,799,143 | ||||||
| Purchases of patent and trademark application costs | (14,255 | ) | (14,378 | ) | ||||
| Net cash provided by investing activities of continuing operations | 4,492,506 | 4,488,669 | ||||||
| Net cash provided by investing activities of discontinued operations | 4,004 | 16,673 | ||||||
| Net cash provided by investing activities | 4,496,510 | 4,505,342 | ||||||
| Cash flows from financing activities: | ||||||||
| Continuing operations: | ||||||||
| Net proceeds from issuance of convertible notes | 4,750,000 | - | ||||||
| Net proceeds from issuance of common stock, net of $336,491 in offering expenses | 1,913,509 | - | ||||||
| Net proceeds from exercise of stock options | 98,260 | - | ||||||
| Redemption of equity rights | (291,995 | ) | - | |||||
| Repayment of notes payable and other obligations | (192,539 | ) | (229,238 | ) | ||||
| Net cash provided by (used in) financing activities of continuing operations | 6,277,235 | (229,238 | ) | |||||
| Net increase in cash and cash equivalents | 7,609,874 | 435,037 | ||||||
| Cash and cash equivalents at beginning of period | 5,529,848 | 2,012,283 | ||||||
| Cash and cash equivalents at end of period | $ | 13,139,722 | $ | 2,447,320 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid during the period for interest | $ | 1,571 | $ | 33,331 | ||||
| Supplemental disclosure of noncash investing and financing activities: | ||||||||
| Conversion of notes payable and accrued interest to preferred stock | $ | 4,798,671 | $ | - | ||||
| Liability payoffs upon property sale | $ | - | $ | 2,064,758 | ||||
| Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities | ||||||||
| Net income (loss) | $ | (353,774 | ) | $ | 11,524 | |||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Stock-based compensation | 7,304 | 37,928 | ||||||
| Depreciation and amortization | 61,366 | 20,791 | ||||||
| Amortization of license fee revenue | (73 | ) | (73 | ) | ||||
| Amortization of right of use assets | 2,891 | (25 | ) | |||||
| Income tax (benefit) expense | (8,839 | ) | 3,730 | |||||
| Issuance of common stock warrant for settlement of advisory fees | — | 1,157 | ||||||
| Impairment of Bitcoin | 132,077 | 17,507 | ||||||
| Impairment of goodwill | 335,648 | — | ||||||
| Change in fair value of derivative asset | (86,865 | ) | (23,806 | ) | ||||
| Change in fair value of contingent consideration | 176 | 444 | ||||||
| Realized loss on sale of marketable securities | 1,624 | — | ||||||
| Realized gain on sale/exchange of long-term investment | — | (26,260 | ) | |||||
| Realized gain on sale/exchange of Bitcoin | (25,443 | ) | (94 | ) | ||||
| Unrealized loss on marketable equity securities | 6,306 | 10,812 | ||||||
| Gain on exchange of equipment | (16,281 | ) | — | |||||
| Bitcoin - mining, net | (124,732 | ) | (108,100 | ) | ||||
| Changes in assets and liabilities: | ||||||||
| Proceeds from sale of Bitcoin | 52,491 | — | ||||||
| Accounts receivable | (1,987 | ) | (2,559 | ) | ||||
| Costs and estimated earnings in excess of billings | (5,257 | ) | — | |||||
| Prepaid expenses and other current assets | (14,959 | ) | (1,220 | ) | ||||
| Future power credits | 43,932 | (444 | ) | |||||
| Accounts payable | (7,373 | ) | 1,080 | |||||
| Billings in excess of costs and estimated earnings | 5,965 | — | ||||||
| Accrued compensation | (737 | ) | 5,326 | |||||
| Accrued expenses | (1,936 | ) | (1,946 | ) | ||||
| Customer deposits | 2,078 | 6,120 | ||||||
| Deferred revenue | (1,647 | ) | (12,757 | ) | ||||
| Lease liability | (2,695 | ) | (9 | ) | ||||
| Net cash used in operating activities | (740 | ) | (60,874 | ) | ||||
| Cash flows from investing activities | ||||||||
| Proceeds from the sale of marketable equity securities | 704 | — | ||||||
| Acquisition of Whinstone, net of cash acquired | — | (40,879 | ) | |||||
| Proceeds from the sale of long-term investments | — | 1,800 | ||||||
| Deposits on equipment | (194,923 | ) | (103,158 | ) | ||||
| Other deposits | (5,479 | ) | — | |||||
| Purchases of property and equipment, including construction in progress | (129,672 | ) | (78,858 | ) | ||||
| Patent costs incurred | (27 | ) | (16 | ) | ||||
| Net cash used in investing activities | (329,397 | ) | (221,111 | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from the issuance of common stock / At-the-market offering | 304,849 | 120,516 | ||||||
| Offering costs for the issuance of common stock / At-the-market offering | (6,455 | ) | (3,045 | ) | ||||
| Proceeds from exercise of common stock warrants | — | 806 | ||||||
| Payments on contingent consideration liability - future power credits | (15,725 | ) | — | |||||
| Repurchase of common shares to pay employee withholding taxes | (9,873 | ) | (1,794 | ) | ||||
| Net cash provided by financing activities | 272,796 | 116,483 | ||||||
| Net decrease in cash and cash equivalents | (57,341 | ) | (165,502 | ) | ||||
| Cash and cash equivalents at beginning of period | 312,315 | 223,382 | ||||||
| Cash and cash equivalents at end of period | $ | 254,974 | $ | 57,880 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | — | $ | — | ||||
| Cash paid for taxes | $ | — | $ | — | ||||
| Supplemental disclosure of noncash investing and financing activities: | ||||||||
| Issuance of common stock for business combination | $ | — | $ | 326,152 | ||||
| Reclassification of deposits to property and equipment | $ | 288,064 | $ | 46,711 | ||||
| Conversion of preferred stock to common stock | $ | 11 | $ | 11 | ||||
| Property and equipment obtained in exchange transaction | $ | 10,409 | $ | — | ||||
| Construction in progress included in accrued expenses | $ | 9,979 | $ | 1,787 | ||||
See Accompanyingthe accompanying Notes to UnauditedCondensed Consolidated Financial Statements,
which are an integral part of these Condensed Consolidated Financial Statements.
| 5 |
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Organization and Operation of Our Business
Nature of Operations:
We are a vertically integrated Bitcoin mining company principally engaged in enhancing our capabilities to mine Bitcoin. We also provide the critical mining infrastructure for our institutional-scale hosted clients to mine Bitcoin at our Bitcoin mining facility in Rockdale, Texas (the “Rockdale Facility”). The accompanying consolidated financial statementsRockdale Facility currently provides 700 megawatts in total capacity. Our Rockdale Facility is believed to be the largest Bitcoin mining facility in North America, as measured by developed capacity, and we are currently expanding its capacity. Additionally, we are beginning development of Riot Blockchain, Inc.a second large-scale Bitcoin mining data center facility in Corsicana, Texas (the “Corsicana Facility”), (f/k/a Bioptix, Inc.) (the "Company," "we," or "Riot Blockchain")which is expected to have been prepared in accordance with the instructions to quarterly reports on Form 10-Q. In the opinionapproximately one gigawatt of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results ofcapacity available for both our Bitcoin mining operations and changeshosting of institutional-scale Bitcoin mining and data center clients upon completion.
We operate in financial position at September 30, 2017an environment that is constantly evolving based on the proliferation of Bitcoin and for all periods presented have been made. Certain informationcryptocurrencies in general. A significant component of our strategy is to effectively and footnote data necessary for fair presentation of financial positionefficiently allocate capital among opportunities that generate the highest return on our investment.
As described in Note 17. “Segment Information” to these unaudited Notes to Condensed Consolidated Financial Statements, we operate in three business segments: (1) Bitcoin Mining (“Mining”), (2) Data Center Hosting (“Data Center Hosting”), and results of operations in conformity with accounting principles generally accepted in the United States of America have been condensed or omitted. It is therefore suggested that these consolidated financial statements be read in conjunction with the summary of significant accounting policies(3) Electrical Products and notes to financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016. The results of operations for the period ended September 30, 2017 are not necessarily an indication of operating results for the full year.Engineering (“Engineering”).
Note 2. Liquidity and basis of presentation:Financial Condition
At September 30, 2017,2022, the Company had approximate balances of cash and cash equivalents of $13,140,000,$255.0 million, working capital of $12,555,000,$369.8 million, total stockholders'stockholders’ equity of $15,466,000$1.3 billion and an accumulated deficit of $120,823,000.$591.6 million. To date, the Company has, in large part, relied on equity financingfinancings to fund its operations.
| December 31, 2016 | ||||||||
| Cost | Fair Value | |||||||
| Certificates of deposit / commercial paper | $ | 2,378,222 | $ | 2,373,891 | ||||
| Corporate bonds | 5,138,182 | 5,132,870 | ||||||
| Total trading securities | $ | 7,516,404 | $ | 7,506,761 | ||||
| 2017 | 2016 | |||||||
| Interest income | $ | 84,177 | $ | 101,236 | ||||
| Realized (losses) | (21 | ) | (2,893 | ) | ||||
| Unrealized gains | 11,575 | 21,501 | ||||||
| Management fee expenses | (12,484 | ) | (16,813 | ) | ||||
| Net investment income | $ | 83,247 | $ | 103,031 | ||||
During the nine months ended September 30, 2017, included2022, the Company paid approximately $194.9 million as partdeposits primarily for miners and reclassified $288.1 million of deposits to property and equipment in connection with the deployment of miners at the Rockdale Facility. As of September 30, 2022, all 55,728 of the discontinued operations impairment loss.Company’s miners were located at the Rockdale Facility.
2022 ATM Offering:
As disclosed in Note 13, “Stockholders’ Equity”, the Company entered into a Sales Agreement with Cantor Fitzgerald & Co., B. Riley Securities, Inc., BTIG, LLC, Roth Capital Partners, LLC, D.A. Davidson & Co., Macquarie Capital (USA) Inc., and adopted accounting pronouncements:
| 6 |
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
COVID-19:
The COVID-19 global pandemic has been unprecedented and unpredictable; there continues to be widespread impact resulting from the COVID-19 pandemic and this is likely to continue to result in significant national and global economic disruption, which may adversely affect our business. Based on our current assessment, however, we do not expect any material impact on our long-term development, our operations, or our liquidity due to the worldwide spread of COVID-19, other than the potential impact of COVID-19 on global logistics discussed below. We continue to monitor this situation and the possible effects on our financial condition, liquidity, operations, suppliers, and industry.
In addition, nationally, we have experienced and are experiencing varying degrees of inflation, resulting in part from various supply chain disruptions, increased shipping and transportation costs, and increased raw material and labor costs as well as other disruptions resulting from the continuing COVID-19 pandemic and general global economic conditions. This inflationary impact on our cost structure has contributed to adjustments in operations and our ability to obtain materials and retain talent, despite a continued focus on reducing our costs where possible.
Global Logistics:
Ongoing global supply logistics have caused delays across all channels of distribution. Similarly, we have also experienced delays in certain of our miner delivery schedules and in our infrastructure development schedules due to constraints on the globalized supply chains for miners, electricity distribution equipment and construction materials. Through the date of this Quarterly Report, we have been able to effectively mitigate delivery delays to avoid materially impacting our miner deployment schedule; however, there are no assurances we will be able to continue to mitigate delivery delays in the future. Additionally, the expansion of the Rockdale Facility and the development of our new accounting pronouncementsCorsicana Facility requires large quantities of construction materials, specialized electricity distribution equipment and other component parts that can be difficult to source. In anticipation of the development of the Corsicana Facility, we have procured and hold much of the required materials to help mitigate against global supply logistic and pricing issues. We also monitor developments in the global supply chain on an ongoing basis and make efforts to determine their applicability. When it is determinedhow that a new accounting pronouncement affectsmay potentially impact our expansion plans. See the Company's financial reporting,discussion under the Company undertakes a study to determine the consequencesheading “Risk Factors” in Part II, Item 1A of this Quarterly Report and under Part I, Item 1A of the change2021 Annual Report for additional discussion regarding potential impacts the global supply chain crisis may have on our operations and plans for expansion.
Note 3. Basis of Presentation, Summary of Significant Accounting Policies and Recent Accounting Pronouncements
Basis of Presentation and Principles of Consolidation:
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to itsthe instructions to Form 10-Q and Article 8 of Regulation S-X of the SEC. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of such interim results. Amounts are in thousands except for share, per share and miner amounts.
The results in the unaudited condensed consolidated statements of operations are not necessarily indicative of results to be expected for the fiscal year ending December 31, 2022 or for any future interim period. The unaudited condensed consolidated financial statements do not include all the information and notes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the fiscal year ended December 31, 2021, and notes thereto, included in the 2021 Annual Report.
Reclassifications:
Certain prior period amounts have been reclassified to conform to the current period presentation in the consolidated financial statements and assures that there are proper controls in place to ascertain that the Company's consolidated financial statements properly reflect the change.
| 7 |
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Use of Estimates:
The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ significantly from those estimates. The most significant accounting estimates inherent in the preparation of operations,the Company’s unaudited condensed consolidated financial statements include estimates associated with valuing contingent consideration for a business combination and cash flows, and any preliminary assessments are subject to change.
Significant Accounting Policies:
For a detailed discussion about the Company’s significant accounting policies, see the Company’s December 31, 2021 consolidated financial statements included in its 2021 Annual Report.
Segment and Reporting Unit Information:
Operating segments are defined as components of an entity for which discrete financial information is available that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. The CODM is comprised of a committee of the Company’s executive officers. The Company had three operating segments as of September 30, 2022. See Note 17. “Segment Information” to these unaudited Notes to Condensed Consolidated Financial Statements.
Income Taxes:
The Company accounts for income taxes under the asset and liability method, in which deferred tax assets and liabilities are recognized through net income. The amendments allow equity investments that do not have readily determinable fair valuesfor 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 re-measured at fair value either upon the occurrence of an observable price changerecovered or upon identification of an impairment.settled. The amendments also require enhanced disclosures about those investments. ASU No. 2016-01 is effective for annual reporting beginning after December 15, 2017, including interim periods within the year of adoption, and calls for prospective application. The Company does not expect the adoption of ASU 2016-01 to have a material impacteffect on its consolidated financial statements.
ASC Topic 740, Income Taxes, (“ASC 740”), which amends guidance issued in Accounting Standards Codification ("ASC") Topic 718, Compensation - Stock Compensation. ASU 2016-09 simplifies several aspects ofalso clarifies the accounting for share-based payment transactions, includinguncertainty 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 consequences, classificationpositions and deductions would be sustained on audit and does not anticipate any adjustments that would result in material changes to its financial position.
During the three and nine months ended September 30, 2022, the deferred income tax benefit of awards as either equity or$3.0 million and $9.7 million, respectively, related primarily to the contingent consideration liability and future power credits. During the three and nine months ended September 30, 2021, the deferred income tax expense of zero and $3.7 million, respectively, related primarily to temporary differences between financial statement carrying amounts of existing assets and liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016,their respective tax bases.
| 8 |
Riot Blockchain, Inc. and interim periods within those fiscal years and early adoption is permitted. The Company has adopted ASU 2016-09 as of January 1, 2017. The principal impact was thatSubsidiaries
Notes to the extent a tax benefit or expense from stock compensation arises it will be presented in theCondensed Consolidated Financial Statements
(Unaudited)
Income (Loss) Per Share:
Basic net income tax line of the Statement of Operations rather than the current presentation as a component of equity on the Balance Sheet. Also the tax benefit or expense will be presented as activity in Cash Flow from Operating Activity rather than the current presentation as Cash Flow from Financing Activity in the Statement of Cash Flows. The Company does not expect the adoption of ASU 2016-09 to have a material impact on its consolidated financial statements.
For the nine months ended September 30, 20172021, the dilutive rights not considered inCompany recorded net income and therefore, EPS was calculated using the calculation,treasury stock method. Dilutive potential common shares include outstanding stock options, unvested shares of stock-based compensation, warrants and the outstanding shares of the Company’s 0% Series AB Convertible Preferred Stock (“Series A(the “Series B Preferred Stock”). Potentially dilutive shares are determined by applying the treasury stock method to the assumed exercise of outstanding thatstock options, restricted stock awards and warrants. Potentially dilutive shares issuable upon conversion of our Series B Preferred Stock for 2021 are convertible into 1,919,472 common shares.
The following is used to calculate basica reconciliation of the numerator and denominator of the diluted earningsnet income (loss) per common share since such preferred stockcomputations for the periods presented below (in thousands except for share and per share amounts):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Basic and diluted income (loss) per share: | ||||||||||||||||
| Net income (loss) | $ | (36,569 | ) | $ | (15,343 | ) | $ | (353,774 | ) | $ | 11,524 | |||||
| Basic weighted average number of shares outstanding | 153,895,123 | 96,064,036 | 133,894,338 | 89,350,180 | ||||||||||||
| Add: | ||||||||||||||||
| Options to purchase common stock | — | — | — | 10,640 | ||||||||||||
| Unvested stock-based compensation | — | — | — | 533,220 | ||||||||||||
| Convertible Series B preferred shares | — | — | — | 2,334 | ||||||||||||
| Diluted weighted average number of shares outstanding | 153,895,123 | 96,064,036 | 133,894,338 | 89,896,374 | ||||||||||||
| Basic net income (loss) per share | $ | (0.24 | ) | $ | (0.16 | ) | $ | (2.64 | ) | $ | 0.13 | |||||
| Diluted net income (loss) per share | $ | (0.24 | ) | $ | (0.16 | ) | $ | (2.64 | ) | $ | 0.13 | |||||
Securities that could potentially dilute income (loss) per share in the future were not included in the computation of diluted income (loss) per share at September 30, 2022 and 2021 because their inclusion would be anti-dilutive are as follows:
| September 30, 2022 | September 30, 2021 | |||||||
| Warrants to purchase common stock | 63,000 | 63,000 | ||||||
| Options to purchase common stock | — | 12,000 | ||||||
| Unvested restricted stock units | 2,286,701 | 4,224,016 | ||||||
| Unvested restricted stock awards | 12,478,290 | — | ||||||
| Convertible Series B preferred stock | — | 2,199 | ||||||
| Total | 14,827,991 | 4,301,215 | ||||||
| 9 |
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Recently Issued and Adopted Accounting Pronouncements:
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40), (“ASU 2021-04”). This ASU reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. This ASU provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses: (1) how an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; (2) how an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. This ASU is effective for all entities for fiscal years beginning after December 15, 2021. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted, including adoption in an interim period. The adoption of ASU 2021-04 on January 1, 2022 did not have a material impact on the Company’s condensed consolidated financial statements or disclosures.
The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequences of the change to its condensed consolidated financial statements and assures that there are proper controls in place to ascertain that the Company’s unaudited condensed consolidated financial statements properly reflect the change.
Note 4. Acquisitions
Acquisition of ESS Metron:
On December 1, 2021 (the “ESS Metron Acquisition Date”), the Company acquired 100% of the equity interests of ESS Metron, LLC (“ESS Metron”). ESS Metron is a participating security under ASC 260 Earnings per Share. power distribution and management systems manufacturing, design and engineering firm based in Denver, Colorado, operating from facilities totaling approximately 121,000 square feet of manufacturing, office and warehouse space in the metropolitan Denver area. These facilities are subject to long-term lease agreements. The two-class methodacquisition of ESS Metron established the Company’s Engineering business and is an earnings allocation formula that determines earnings per shareexpected to enhance the Company’s ability to scale its Bitcoin mining and data center hosting business as planned.
The ESS Metron Acquisition Date fair value of the total consideration transferred was comprised of $25 million of cash, adjusted for each classnet working capital and other items, and 715,413 shares of the Company’s common stock, and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Underno par value, with a fair value of approximately $26.7 million. Of the two-class method, basic earnings (loss) per common share is computed by dividing net earnings (loss) attributable to common share after allocation of earnings to participating securities by the weighted-average number of715,413 shares of common stock, outstanding during645,248 shares were issued upon closing, and the year. Diluted earnings (loss) per common share, when applicable, is computed usingremaining 70,165 shares were withheld as security for the more dilutivesellers’ indemnification obligations for the 18 months following the transaction closing date.
Other than an insignificant post-closing settlement of preliminary net working capital pursuant to the Membership Interest Purchase Agreement dated December 1, 2021, there have been no adjustments to the provisional purchase price and fair value estimates presented in Note 4. “Acquisitions” of the two-class method or2021 Annual Report. The Company expects to finalize the if-converted method. In periodsvaluation of net loss, no effectthese assets and liabilities, and consideration transferred, as soon as practicable, but not later than one year from the ESS Metron Acquisition Date. Any changes to the preliminary estimates of the fair value of the assets acquired and liabilities assumed will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill.
Acquisition of Whinstone:
On May 26, 2021 (the “Whinstone Acquisition Date”), the Company acquired 100% of the equity interests of Whinstone US, Inc. (“Whinstone”), the owner and operator of a Bitcoin mining and data center hosting facility, for approximately $460 million (the “Whinstone Acquisition”). The assets, operations and skilled workforce of Whinstone immediately increased the scale and scope of Riot’s operations, and is given to participating securities since they do not contractually participatea foundational element in the lossesCompany’s strategy to grow its industry-leading, vertically-integrated Bitcoin mining platform on a global scale.
| 10 |
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Whinstone Acquisition Date fair value of the Company.
Other than the impairment charge to common stockholders (the numerator) bygoodwill described below, there have been no adjustments to the weighted-average numberprovisional purchase price and fair value estimates presented in Note 4. “Acquisitions”, of common shares outstanding (the denominator) during the period. Income available2021 Annual Report. The Company finalized the valuation of these assets and liabilities, and consideration transferred, in May of 2022.
Impairment of Goodwill:
In response to common stockholders shall be computed by deducting both the dividends declaredrecent adverse changes in business climate, including decreases in the period on preferred stockprice of Bitcoin and the dividends accumulated forrelated volatility of equity markets, including the period on cumulative preferred stock from income from continuing operations. DividendsBitcoin mining industry, as evidenced by declines in the market price of the Company’s securities, those of its peers, and major market indices, during the nine months ended September 30, 2017 were de minimis.
September 30, 2017 | December 31, 2016 | |||||||
| Office and computer equipment | $ | 114,309 | $ | 116,510 | ||||
| Less accumulated depreciation | 110,196 | 110,972 | ||||||
| $ | 4,113 | $ | 5,538 | |||||
Beginning Balance (December 31, 2016) | Additions | Impairments | Ending Balance (September 30, 2017) | |||||||||||||
| Cost: | ||||||||||||||||
| Patents | $ | 1,032,982 | $ | 14,255 | $ | — | $ | 1,047,237 | ||||||||
| Goodwill | 447,951 | — | — | 447,951 | ||||||||||||
| Total | 1,480,933 | 14,255 | — | 1,495,188 | ||||||||||||
| Accumulated Amortization: | ||||||||||||||||
| Patents | (482,183 | ) | (52,974 | ) | — | (535,157 | ) | |||||||||
| Goodwill | (60,712 | ) | — | — | (60,712 | ) | ||||||||||
| Total | (542,895 | ) | (52,974 | ) | — | (595,869 | ) | |||||||||
| Net Other Long Term Assets | $ | 938,038 | $ | (38,719 | ) | $ | — | $ | 899,319 | |||||||
Pro Forma Information (Unaudited):
The following unaudited pro forma financial information summarizes the balance of 500,000 units for $1,250,000 were released in May 2017. The offering net of $336,491 of offering expenses, resulted in proceeds of $1,913,509 recorded as additional equity.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Restricted stock awards under the Plan | $ | 100,396 | $ | — | $ | 188,572 | $ | — | ||||||||
| Stock option awards under the Plan | 8,172 | 137,367 | 103,430 | 361,639 | ||||||||||||
| Non-qualified stock option awards | — | 6,820 | 87,620 | 6,820 | ||||||||||||
| Total stock-based compensation | $ | 108,568 | $ | 144,187 | $ | 379,622 | $ | 368,459 | ||||||||
| Number of Shares | Weighted Average Grant-Date Fair Value | |||||||
| Unvested at January 1, 2017 | - | $ | - | |||||
| Granted | 422,000 | 3.69 | ||||||
| Vested | (42,622 | ) | 3.20 | |||||
| Forfeited | (40,000 | ) | 3.13 | |||||
| Unvested at September 30, 2017 | 339,378 | $ | 3.75 | |||||
| 2017 | 2016 | |||||||
| Dividend yield | 0 | % | 0 | % | ||||
| Expected price volatility | 101 | % | 99-100 | % | ||||
| Risk free interest rate | 1.92 | % | 1.20 | % | ||||
| Expected term | 5 years | 5 years | ||||||
Shares Underlying Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at January 1, 2017 | 566,747 | $ | 20.46 | |||||||||||||
| Granted | 20,000 | 4.02 | ||||||||||||||
| Exercised | (34,000 | ) | 2.89 | |||||||||||||
| Forfeited | (495,414 | ) | 22.98 | |||||||||||||
| Outstanding at September 30, 2017 | 57,333 | $ | 3.32 | 9.1 | $ | 105,700 | ||||||||||
| Exercisable at September 30, 2017 | 27,500 | $ | 3.07 | 8.8 | $ | 57,500 | ||||||||||
| Nonvested Shares | Nonvested Shares Underlying Options | Weighted Average Exercise Price | Weighted Average Grant Date Fair Value | |||||||||
| Nonvested at January 1, 2017 | 97,738 | $ | 3.51 | $ | 2.58 | |||||||
| Granted | 20,000 | 4.02 | 3.04 | |||||||||
| Vested | (30,905 | ) | 4.92 | 3.57 | ||||||||
| Forfeited | (57,000 | ) | 2.92 | 2.16 | ||||||||
| Nonvested at September 30, 2017 | 29,833 | $ | 3.54 | $ | 2.67 | |||||||
Shares Underlying Options / Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at January 1, 2017 | 527,003 | $ | 13.36 | |||||||||||||
| Granted | 2,800,000 | 3.54 | ||||||||||||||
| Exercised | - | - | ||||||||||||||
| Forfeited | (169,074 | ) | 18.62 | |||||||||||||
| Outstanding at September 30, 2017 | 3,157,929 | $ | 4.37 | 2.3 | $ | 4,534,000 | ||||||||||
| Exercisable at September 30, 2017 | 3,157,929 | $ | 4.37 | 2.3 | $ | 4,534,000 | ||||||||||
| Category | Totals | |||
| License fees and milestone amounts paid / achieved | $ | 1,920,000 | ||
| Third party obligations recorded, including WU | (363,700 | ) | ||
| Deferred revenue balance | 1,556,300 | |||
| Revenue amortization to September 30, 2017 | (466,810 | ) | ||
| Net deferred revenue balance at September 30, 2017 | $ | 1,089,490 | ||
| Cash and cash equivalents | $ | 17,000 | ||
| Accounts receivable | 21,000 | |||
| Inventory | 379,000 | |||
| Prepaid and other assets | 51,000 | |||
| Equipment | 1,000 | |||
| Identifiable intangible assets: | ||||
| Trademarks (5 year estimated useful life) | 99,000 | |||
| Customer base (6 year estimated useful life) | 37,000 | |||
| Developed technology (4 year estimated useful life) | 1,864,000 | |||
| Total identifiable intangible assets | 2,000,000 | |||
| Goodwill | 430,000 | |||
| Accounts payable | (118,000 | ) | ||
| Accrued and other liabilities | (175,000 | ) | ||
| Non-controlling interest | (29,000 | ) | ||
| Purchase price | $ | 2,577,000 |
| Trademarks | $ | 99,000 | ||
| Customer base | 37,000 | |||
| Developed technology | 1,864,000 | |||
| Total | 2,000,000 | |||
| Less accumulated amortization | (148,264 | ) | ||
| Balance at December 31, 2016 | $ | 1,851,736 |
| Three Months Ended September 30, 2021 | Nine Months Ended September 30, 2021 | |||||||
| Total revenue | $ | 64,807 | $ | 132,693 | ||||
| Net income | $ | (12,136 | ) | $ | 115,326 | |||
Acquisition of Corsicana Facility Land Site:
During the nine months ended September 30, 2022, the Company announced that it has initiated a large-scale development to expand its Bitcoin mining and data center hosting capabilities in Navarro County, Texas with the acquisition of the 265-acre site where the anticipated one-gigawatt Corsicana Facility will be constructed. The initial phase of the development of the Corsicana Facility involves the construction on the 265-acre site of 400 megawatts of immersion-cooled Bitcoin mining and data center hosting infrastructure spread across multiple buildings, as well as a high-voltage power substation and transmission facilities to supply power to the facility. Construction of the substation and the data centers is expected to be carried out concurrently, with self-mining and data center hosting operations expected to commence by the fourth quarter of 2023, following the commissioning of the substation, which is expected to be completed in summer 2023.
This first phase of the development of the Corsicana Facility includes land acquisition, site preparation, substation development, and transmission construction, along with construction of ancillary buildings and four buildings utilizing the Company’s immersion-cooling infrastructure and technology. Through September 30, 2022, the Company has incurred costs of approximately $30 million related to the development of the Corsicana Facility, including $10 million for land, $15 million of initial developments costs and a $5 million deposit for future power usage.
| 11 |
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 5. Revenue from Contracts with Customers
The Company recognizes revenue when it transfers promised services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those services.
Disaggregated revenue:
The following table presents the Company’s revenues disaggregated into categories based on the nature of such revenues (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Mining | $ | 22,070 | $ | 53,590 | $ | 126,166 | $ | 108,213 | ||||||||
| Data center hosting | 8,371 | 11,193 | 27,899 | 14,067 | ||||||||||||
| Engineering | 15,824 | — | 44,886 | — | ||||||||||||
| Other | 25 | 25 | 73 | 73 | ||||||||||||
| Total revenue | $ | 46,290 | $ | 64,808 | $ | 199,024 | $ | 122,353 | ||||||||
Contract balances:
Contract assets consist of costs and estimated earnings in excess of billings on uncompleted engineering contracts. The balance was entirely from the ESS Metron acquisition, and was $15.1 million and $9.9 million as of September 30, 2022 and December 31, 2016 inventories,2021, respectively.
The Company’s contract liabilities primarily relate to upfront payments and consideration received from customers for Data Center Hosting, billings in excess of costs and estimated earnings on uncompleted Engineering contracts and the upfront license fee generated from our legacy animal health business. The table below presents changes in the total deferred revenue liability and billings in excess of costs and estimated earnings.
| Beginning balance - January 1, 2022 | $ | 27,903 | ||
| Revenue recognized | (1,720 | ) | ||
| Billings in excess of costs and estimated earnings | 5,965 | |||
| Ending balance - September 30, 2022 | $ | 32,148 |
Transaction price allocated to remaining performance obligations:
Remaining performance obligations represent the transaction price of contracts for work that has not yet been performed. Amounts related to Bitcoin mining are not included because the Company elected the practical expedient to not disclose amounts related to contracts with current assetsa duration of discontinued operations, totaledone year or less.
Additionally, we have elected to use the practical expedient to not adjust the transaction price for the existence of a significant financing component if the timing difference between a customer’s payment and our performance is one year or less.
| 12 |
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 6. Bitcoin
The following table presents additional information about the Company’s Bitcoin:
| Beginning balance - January 1, 2022 | $ | 159,544 | ||
| Revenue recognized from Bitcoin mined | 126,166 | |||
| Proceeds from sale of Bitcoin | (52,491 | ) | ||
| Exchange of Bitcoin for employee compensation | (1,434 | ) | ||
| Realized gain on sale/exchange of Bitcoin | 25,443 | |||
| Impairment of Bitcoin | (132,077 | ) | ||
| Ending balance - September 30, 2022 | $ | 125,151 |
Note 7. Investments in Marketable Equity Securities
On June 28, 2022, the Company sold 800,000 shares of Mogo Inc. (“Mogo”) at a net sales price of $0.88 per share, received proceeds of approximately $416,000, consisting$0.7 million and recognized a realized loss of $188,000 in raw materialsapproximately $1.6 million. During the three months ended September 30, 2022, the Company recorded an unrealized gain of approximately $0.1 million and $228,000 in finished goods, all associated withduring the BDI operations. nine months ended September 30, 2022, recorded an unrealized loss of $6.3 million on the remaining 2.4 million shares of Mogo, based on the closing price per share of Mogo common stock on the Nasdaq Stock Market on September 30, 2022 of $0.92. During the three and nine months ended September 30, 2021, the Company recorded unrealized losses of $11.2 million and $10.8 million, respectively, on its original 3.2 million shares of Mogo. The daily share price of Mogo is extremely volatile and the value may be more or less than the amount recorded as of September 30, 2022.
Note 8. Property and Equipment
Property and equipment:
Property and equipment consisted of the following as of September 30, 2022 and December 31, 2021:
| Life (Years) | September 30, 2022 | December 31, 2021 | ||||||||||
| Buildings and building improvements | 10-25 | $ | 187,596 | $ | 88,808 | |||||||
| Land rights and land improvements | n/a | 10,089 | — | |||||||||
| Miners and mining equipment | 2 | 400,892 | 87,921 | |||||||||
| Machinery and facility equipment | 5-7 | 22,670 | 15,613 | |||||||||
| Office and computer equipment | 3 | 1,233 | 1,007 | |||||||||
| Construction in progress | 107,744 | 113,598 | ||||||||||
| Total cost of property and equipment | 730,224 | 306,947 | ||||||||||
| Less accumulated depreciation | (80,033 | ) | (30,467 | ) | ||||||||
| Property and equipment, net | $ | 650,191 | $ | 276,480 | ||||||||
As of September 30, 2017 no inventories were on hand.2022, the Company had deployed a total of 55,728 miners in its mining operation, all at the Rockdale Facility.
During the quarternine months ended March 31, 2017,September 30, 2022, the Company madepaid approximately $194.9 million as deposits, primarily for ASIC miners, which are scheduled to be shipped monthly through December 2022. During the decisionnine months ended September 30, 2022, the Company reclassified $288.1 million to discontinueproperty and equipment in connection with the operationsdeployment of miners at the Rockdale Facility.
| 13 |
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
During the nine months ended September 30, 2022, the Company elected not to renew its co-location mining services agreement with Coinmint, which was therefore terminated automatically by its terms, effective as of July 8, 2022. In connection with the termination of its wholly-owned subsidiary BDI. BDI had developed a proprietary Enhanced Surface Plasmon Resonance technology platformagreement with Coinmint, the Company arranged for the detection of molecular interactions. The decision to adopt this plan was made following an evaluation by the Company's Board of Directors in January 2017transfer of the estimated resultsminers it was operating at Coinmint’s Massena, New York facility (the “Coinmint Facility”) to the Company’s Rockdale Facility. The Company also entered into an equipment exchange agreement (the “Swap Agreement”) with a third-party Bitcoin mining company (the “Counterparty”) whereby Riot transferred approximately 5,700 of operations projectedthe Antminer model S19 Pro miners it had previously deployed at the Coinmint Facility to the Counterparty in exchange for the Counterparty delivering 5,000 factory-new Antminer model S19j Pro miners to Riot at the Rockdale Facility. Pursuant to the Swap Agreement, the miner exchange occurred in two stages. The first exchange occurred in June 2022, and the second exchange occurred in July 2022. After completing the transfer of the miners to the Counterparty under the Swap Agreement, the Company relocated the balance of the miners it had deployed at the Coinmint Facility to the Rockdale Facility. In accordance with ASC 610-20, Sales and transfers of nonfinancial assets, (“ASC 610-20”), during the nearthree and nine months ended September 30, 2022, the Company recognized a gain on exchange of equipment of $7.7 million and $16.3 million, respectively, associated with the miners exchanged in June and July.
During the year ended December 31, 2021, the Company entered into six additional purchase agreements with Bitmain Technologies Ltd. (“Bitmain”) to mid-term periodacquire 52,500 Antminer model S19j miners and 30,000 of their latest Antminer model S19XP miners for BDI, including considerationa combined total purchase price of product development requiredapproximately $535.0 million. Pursuant to these agreements and updated sales forecasts, and estimated additional cash resources required. The Company expects to dispose of the assets and operations during 2017 by selling the assets and licensing the intellectual property rights. The Company has recognized the exit of BDI in accordance with Accounting Standards Codification (ASC) 205-20, Discontinued Operations. As such, the historical results of BDI, following its 2016 acquisition, have been classified as discontinued operations.
Included in construction in progress as of September 30, 2022, are deposit payments of approximately $0.1 million that relate to a Whinstone initiative for providing certain on-site temporary housing for stakeholders, including partners, analysts, stockholders, etc. The initiative arose as a result of limited accommodations for visitors in the Rockdale, Texas, area, which is generally a remote area. The transaction as contemplated would involve Whinstone developing the temporary housing on land to be purchased from by Lyle Theriot (indirectly, through a limited liability company). Mr. Theriot is part of the management team at Whinstone and is considered a related party of Whinstone. The Company is evaluating certain related party implications of the initiative on an ongoing basis, under U.S. GAAP and other applicable regulatory reporting requirements including, but not limited to, the Sarbanes-Oxley Act of 2002.
Depreciation and amortization expense related to property and equipment totaled approximately $26.2 million and $7.3 million for the three months ended September 30, 2022 and 2021, respectively, and approximately $60.3 million and $15.0 million for the nine months ended September 30, 2022 and 2021, respectively.
Depreciation is computed on the straight-line basis for the periods the assets are in service.
| 14 |
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Commitment:
As of September 30, 2022, the Company had outstanding executed purchase agreements for the purchase of miners from Bitmain for a total of approximately 12,097 new model S19j Pro miners and 19,947 new model S19XP miners. Miners are scheduled to be shipped through December 2022. Pursuant to these agreements, approximately $44.9 million remains payable to Bitmain, subject to future adjustments as provided in the contracts. A summary of the purchase agreement commitments, deposits paid and expected delivery timing (remaining balances are payable in advance of shipping) is summarized as follows (in thousands):
| Agreement Date (1) | Original Purchase Commitment | Open Purchase Commitment | Deposit Balance | Expected Shipping | ||||||||||
| April 5, 2021 | $ | 138,506 | $ | 10,395 | $ | 53,070 | Fourth Quarter 2022 | |||||||
| October 29, 2021 | 56,250 | (422 | ) | 1,609 | Fourth Quarter 2022 | |||||||||
| November 22, 2021 | 32,550 | 2,969 | 21,938 | Fourth Quarter 2022 | ||||||||||
| December 10, 2021 | 97,650 | 11,865 | 65,814 | Fourth Quarter 2022 | ||||||||||
| December 24, 2021 | 202,860 | 20,118 | 134,904 | Fourth Quarter 2022 | ||||||||||
| Total | $ | 527,816 | $ | 44,925 | $ | 277,335 |
(1) Pursuant to the Company’s agreements with Bitmain, among other provisions, the Company is responsible for all shipping charges incurred in connection with the delivery of the miners.
Note 9. Intangible Assets and Goodwill
Intangible Assets, net:
Intangible assets consisted of the following as of September 30, 2022 and December 31, 2016:2021:
| September 30, 2017 | December 31, 2016 | |||||||
| Current assets: | ||||||||
| Accounts receivable | $ | 8,000 | $ | 5,000 | ||||
| Inventories | - | 416,000 | ||||||
| Prepaid expenses | 4,000 | 66,000 | ||||||
| Total current assets | $ | 12,000 | $ | 487,000 | ||||
| Equipment and furnishings, net | $ | - | $ | 36,000 | ||||
| Intangible assets, net | - | 2,281,000 | ||||||
| Deposit | - | 37,000 | ||||||
| Total noncurrent assets | $ | - | $ | 2,354,000 | ||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 37,000 | $ | 174,000 | ||||
| Accrued expenses | 28,000 | 85,000 | ||||||
| Deferred revenue | 137,000 | - | ||||||
| Total current liabilities | $ | 202,000 | $ | 259,000 | ||||
| Gross book value | Accumulated amortization | Net book value | Weighted-average life (years) | |||||||||||||
| Customer contracts | $ | 6,300 | $ | (417 | ) | $ | 5,883 | 10 | ||||||||
| Trademark | 5,000 | (517 | ) | 4,483 | 10 | |||||||||||
| UL Listings | 2,700 | (188 | ) | 2,512 | 12 | |||||||||||
| Patents | 561 | (422 | ) | 139 | Various | |||||||||||
| Intangible assets, net as of September 30, 2022 | $ | 14,561 | $ | (1,544 | ) | $ | 13,017 | |||||||||
| Gross book value | Accumulated amortization | Net book value | Weighted-average life (years) | |||||||||||||
| Customer contracts | $ | 6,300 | $ | (51 | ) | $ | 6,249 | 10 | ||||||||
| Trademark | 5,000 | (42 | ) | 4,958 | 10 | |||||||||||
| UL Listings | 2,700 | (19 | ) | 2,681 | 12 | |||||||||||
| Patents | 742 | (468 | ) | 274 | Various | |||||||||||
| Intangible assets, net as of December 31, 2021 | $ | 14,742 | $ | (580 | ) | $ | 14,162 | |||||||||
The intangible assets are amortized over their respective original useful lives. The Company recorded amortization expense of $0.4 million and $4.9 million for the three months ended September 30, 2022 and 2021, respectively, and $1.1 million and $5.8 million for the nine months ended September 30, 2022 and 2021, respectively.
| 15 |
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The estimated future amortization expense associated with intangible assets is as follows:
| Estimated amortization expense | ||||
| For the three months ending December 31, 2022 | $ | 694 | ||
| For the year ending December 31, 2023 | 1,386 | |||
| For the year ending December 31, 2024 | 1,377 | |||
| For the year ending December 31, 2025 | 1,376 | |||
| For the year ending December 31, 2026 | 1,374 | |||
| For the year ending December 31, 2027 | 1,362 | |||
| For the year ending December 31, 2028 and thereafter | 5,448 | |||
| Total | $ | 13,017 | ||
Goodwill:
The following table represents the changes in goodwill for the nine months ended September 30, 2022:
| Balance at January 1, 2022 | $ | 335,563 | ||
| Impairment | (335,648 | ) | ||
| ESS Metron purchase accounting adjustment | 85 | |||
| Balance at September 30, 2022 | $ | — |
During the second quarter of 2022, adverse changes in business climate, including decreases in the price of Bitcoin and increased volatility of equity markets, as evidenced by declines in the market price of the Company’s securities, those of its peers, and major market indices, have reduced market multiples and increased weighted-average costs of capital, primarily driven by an increase in interest rates. Market concerns related to inflation, supply chain disruption issues and other macroeconomic factors have been some of the primary causes for these declines. Additionally, the price of Bitcoin has declined significantly, notably during the second quarter of 2022. Due primarily to these factors, the Company determined that a triggering event had occurred, and therefore, performed an interim goodwill impairment assessment as of June 30, 2022. The valuation of our reporting units was determined with the assistance of an independent valuation specialist firm using a market approach. The market approach was based on the Guideline Public Company Method, which is derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting units operate, giving consideration to risk profiles, size, geography, and diversity of products and services. Under the market approach, the Company evaluated the fair value based on trailing and forward-looking earnings and revenue multiples derived from comparable publicly traded companies with similar market position and size as the Company’s reporting units. The unobservable inputs used to measure the fair value included projected revenue growth rates, the price of Bitcoin, the global Bitcoin network hash rate, the timing of miner shipments under currently executed contracts and their subsequent deployment, and the determination of appropriate market comparison companies. The trailing-twelve-month and next-twelve-month enterprise value-to-revenue multiples assumed in the analysis ranged from approximately 0.7x to approximately 3.9x. The resulting estimated fair values of the combined reporting units were reconciled to the Company’s market capitalization, including an estimated implied control premium of approximately 30%.
| 16 |
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The results of the discontinued operationquantitative test indicated the fair value of the reporting units did not exceed their carrying amounts, including goodwill. The difference between the carrying amount and the fair value of $335.6 million was recognized as a non-cash impairment charge during the nine months ended September 30, 2022.
Note 10. Long-Term Assets
Deposits:
Deposits consisted of the following as of September 30, 2022:
| Deposits on equipment | ||||
| Beginning balance at January 1, 2022 | $ | 261,215 | ||
| Additions | 194,923 | |||
| Reclassification to equipment | (288,064 | ) | ||
| Ending balance | 168,074 | |||
| Security and other deposits | 10,428 | |||
| Deposits at September 30, 2022 | $ | 178,502 | ||
Deposits on Equipment:
During the nine months ended September 30, 2022, the Company paid approximately $194.9 million as deposits, primarily for miners, and, as of September 30, 2022, reclassified $288.1 million to property and equipment in connection with the deployment of miners at the Rockdale Facility. See Note 8. “Property and Equipment” to these unaudited Notes to Condensed Consolidated Financial Statements.
Right of Use Assets:
See Note 12. “Leases” to these unaudited Notes to Condensed Consolidated Financial Statements.
Note 11. Accrued Expenses
As of September 30, 2022 and December 31, 2021, the Company’s accrued expenses consisted of the following:
| September 30, 2022 | December 31, 2021 | |||||||
| Construction in progress | $ | 9,979 | $ | 12,110 | ||||
| Power related costs and remittances | 20,530 | — | ||||||
| Insurance | — | 2,507 | ||||||
| Other | 3,216 | 1,527 | ||||||
| Total accrued expenses | $ | 33,725 | $ | 16,144 | ||||
| 17 |
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 12. Leases
At September 30, 2022, the Company had operating leases for its offices, manufacturing facilities of ESS Metron, and a ground lease at the Rockdale Facility that expire on various dates through January 2032, inclusive of extension options the Company is reasonably certain will be exercised.
Rental expense for lease payments related to the Company’s operating leases is recognized on a straight-line basis over the remaining lease term. The Company currently does not hold any finance leases. The Company elected to use the practical expedient of not separating lease components for its real estate leases. The Company has elected the short-term lease exception provided, and therefore only recognizes right of use assets and lease liabilities for leases with a term greater than one year. Leases qualifying for the short-term lease exception were insignificant.
As of September 30, 2022 and December 31, 2021, the right of use assets were $21.8 million and $13.2 million, respectively, and the operating lease liabilities were $22.2 million and $13.4 million, respectively, in the accompanying unaudited condensed consolidated balance sheets related to our ground lease and office leases. Operating lease right of use assets are included within long-term assets on the unaudited condensed consolidated balance sheets.
During the nine months ended September 30, 2022, the Company executed a third lease amendment to the ground lease for the Rockdale facility, to add a second 100-acre tract of real property contiguous to the existing 100-acre tract on which the existing Rockdale Facility sits for an additional $0.9 million in annual payments. The initial term of the lease is scheduled to expire on January 31, 2032, followed by three ten-year renewal periods, unless terminated earlier. Concurrent with this third amendment, the Company executed a first amendment to the water reservation agreement to obtain additional non-potable cooling water from a nearby lake to be used by the Company for commercial purposes, such as followsevaporative cooling in our data center facility, for an additional $1.0 million in annual payments. The term of the original water reservation agreement was reset for a period of approximately twelve years from the original commencement date in April 2021, and is now scheduled to expire on January 31, 2032, followed by three ten-year renewal periods, unless terminated earlier.
| 18 |
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The components of lease expense for the three and nine months ended September 30, 2017:2022 (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Operating lease cost | $ | 844 | $ | 321 | $ | 2,268 | $ | 430 | ||||||||
| Variable lease cost(1) | 45 | 11 | 121 | 19 | ||||||||||||
| Operating lease expense | 889 | 332 | 2,389 | 449 | ||||||||||||
| Short-term lease rent expense | — | 15 | — | 15 | ||||||||||||
| Total rent expense | $ | 889 | $ | 347 | $ | 2,389 | $ | 464 | ||||||||
| Three Months | Nine Months | |||||||
| Sales | $ | 7,000 | $ | 37,000 | ||||
| Cost of sales | 2,000 | 6,000 | ||||||
| Gross margin | 5,000 | 31,000 | ||||||
| Operating expenses (credit) | (26,000 | ) | 975,000 | |||||
| Operating income (loss) | 31,000 | (944,000 | ) | |||||
| Escrow forfeiture gain | - | 135,000 | ||||||
| Impairment (loss) | - | (2,754,000 | ) | |||||
| Income (loss) from discontinued operations | $ | 31,000 | $ | (3,563,000 | ) | |||
| (1) | Amounts primarily include common area maintenance and utility charges not included in the measurement of right of use assets and operating lease liabilities. |
The following table presents other amounts related to our leases:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Operating cash flows from operating leases | $ | 249 | $ | 322 | $ | 2,471 | $ | 463 | ||||||||
| Right of use assets exchanged for new operating lease liabilities | $ | 1,088 | $ | — | $ | 10,377 | $ | 8,387 | ||||||||
| Weighted-average remaining lease term – operating leases | 8.9 | 7.0 | 8.9 | 7.0 | ||||||||||||
| Weighted-average discount rate – operating leases | 6.6 | % | 7.5 | % | 6.6 | % | 7.5 | % | ||||||||
The following table presents our future minimum operating lease payments as of, and subsequent to, September 30, 2022 under ASC 842 (in thousands):
| Ground lease | Office and other leases | Total | |||||||||||
| Three months ending December 31, 2022 | $ | — | $ | 275 | $ | 275 | |||||||
| 2023 | 1,940 | 1,234 | 3,174 | ||||||||||
| 2024 | 1,998 | 1,263 | 3,261 | ||||||||||
| 2025 | 2,058 | 1,181 | 3,239 | ||||||||||
| 2026 | 2,119 | 1,107 | 3,226 | ||||||||||
| 2027 | 2,183 | 1,134 | 3,317 | ||||||||||
| Thereafter | 9,618 | 3,222 | 12,840 | ||||||||||
| Total undiscounted lease payments | 19,916 | 9,416 | 29,332 | ||||||||||
| Less present value discount | (5,514 | ) | (1,609 | ) | (7,123 | ) | |||||||
| Present value of lease liabilities | $ | 14,402 | $ | 7,807 | $ | 22,209 | |||||||
We recognize ground lease expense in cost of revenues – Data Center Hosting, and office and other lease expense in selling, general and administrative expenses, respectively, in the impairment lossaccompanying unaudited condensed consolidated statements of operations.
Note 13. Stockholders’ Equity
Preferred stock:
During the nine months ended September 30, 2022, the remaining 2,199 shares of the Company’s 0% Series B Convertible Preferred Stock were converted to 2,199 shares of its common stock.
At-the-Market Equity Offering:
During the nine months ended September 30, 2022, in connection with the At-the-Market Sales Agreement between the Company and its Sales Agents, the Company received gross proceeds of approximately $304.9 million ($298.4 million net of $6.5 million in expenses) from the sale of 37,052,612 shares of common stock, at a weighted average price of $8.23 per share.
| 19 |
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Common Stock:
During the nine months ended September 30, 2022, 1,648,861 shares of common stock were issued to the Company’s officers and employees in settlement of an equal number of fully vested restricted stock units awarded to such individuals by the Company pursuant to grants made under the Riot Blockchain, Inc. 2019 Equity Incentive Plan, as amended from time to time (the “2019 Equity Plan”). The Company withheld 642,897 of these shares at a fair value of approximately $9.9 million, to cover taxes related to the settlement of these vested restricted stock units, as permitted by the 2019 Equity Plan. See Note 14. “Restricted Common Stock, Stock Options, Restricted Stock Units and Warrants” to these unaudited Notes to Condensed Consolidated Financial Statements.
Note 14. Restricted Common Stock, Stock Options, Restricted Stock Units and Warrants
Stock-Based Compensation:
The Company provides stock-based compensation to directors, employees and consultants under the 2019 Equity Plan, which was approved by stockholders on October 23, 2019 at the 2019 Annual Meeting of Stockholders. On November 12, 2020 at the 2020 Annual Meeting of Stockholders, the stockholders approved the First Amendment to the 2019 Equity Plan, which raised the total number of shares of the Company’s common stock by 3,500,000 shares. On October 19, 2021, at the 2021 Annual Meeting of Stockholders, the Company’s stockholders approved the Second Amendment to its 2019 Equity Plan, which increased the number of shares of the Company’s common stock reserved for issuance by 4,400,000 shares. On July 27, 2022, at the 2022 Annual Meeting of Stockholders, the Company’s stockholders approved the Third Amendment to its 2019 Equity Plan, which increased the number of shares of the Company’s common stock reserved for issuance by 10,000,000 shares.
The Company’s stock-based compensation expenses recognized during the three and nine months ended September 30, 2022 and 2021 were included in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations.
The Company recognized stock-based compensation expense during the three and nine months ended September 30, 2022 and 2021 as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Service-based restricted stock awards | $ | 1,918 | $ | 1,518 | $ | 5,856 | $ | 3,423 | ||||||||
| Performance-based restricted stock awards | 1,643 | 34,505 | 1,448 | 34,505 | ||||||||||||
| Total stock-based compensation | $ | 3,561 | $ | 36,023 | $ | 7,304 | $ | 37,928 | ||||||||
Restricted Common Stock:
During the three months ended September 30, 2022, the Company granted 754,536 restricted stock units (RSUs) under the 2019 Equity Plan, including: (a) 48,337 service-based RSUs with a fair value of approximately $0.3 million, which are generally eligible to vest in four quarterly tranches following the grant date, subject to the recipient’s continued employment with the Company through the vesting date; and (b) 696,999 performance-based RSUs with a fair value of approximately $3.4 million, which are eligible to vest based on the Company’s achievement of certain performance objectives, as specified under the performance-based restricted stock unit plan adopted on August 12, 2021 under the 2019 Equity Plan.
During the three months ended September 30, 2022, 486,781 shares of common stock were issued to the Company’s officers and employees in settlement of an equal number of fully vested RSUs awarded to such individuals by the Company pursuant to grants made under the 2019 Equity Plan. The Company withheld 156,502 of these shares at a fair value of approximately $1.1 million, in satisfaction of withholding taxes related to the settlement of these vested restricted stock units, as permitted by the 2019 Equity Plan and approved by the Compensation Committee of the Company’s Board of Directors.
During the three months ended September 30, 2022, the Company’s board of directors approved the exchange of all outstanding unvested performance and service-based RSUs for performance and service-based restricted stock awards (RSAs) on a one-for-one basis. All material terms of the award agreements remain the same, including the timing of all vesting periods and the vesting benchmarks. During the quarter ended September 30, 2022, approximately 2.1 million unvested RSUs were exchanged for RSAs (see tables below for details).
| 20 |
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Performance-based RSUs
A summary of the Company’s unvested performance-based RSUs for the nine months ended September 30, 20172022 is presented here:
| Number of Shares | Weighted Average Grant-Date Fair Value | |||||||
| Unvested at January 1, 2022 | 3,404,585 | $ | 36.68 | |||||
| Granted | 1,412,299 | $ | 10.70 | |||||
| Vested | (729,209 | ) | $ | 35.21 | ||||
| Forfeited | (398,871 | ) | $ | 35.32 | ||||
| Converted to RSAs | (1,979,002 | ) | $ | 32.27 | ||||
| Unvested at September 30, 2022 | 1,709,802 | $ | 27.15 | |||||
During the nine months ended September 30, 2022, the Company awarded 1,412,299 performance-based RSUs with a fair value of $15.1 million under the 2019 Equity Plan to employees, which are eligible to vest upon the successful completion of specified milestones related to added infrastructure capacity and financial targets over the performance period ending on December 31, 2023.
The value of performance-based RSU’s is measured based on their fair value on the discontinuancedate of BDIgrant and amortized over their respective estimated implicit service periods.
During the nine months ended September 30, 2022, 1,979,002 of the outstanding and unvested performance-based RSUs were converted into an equivalent number of performance-based RSAs with substantially the same terms as the performance-based RSU agreements they replaced.
Performance-based RSAs
A summary of the Company’s unvested performance-based RSAs for the nine months ended September 30, 2022 is presented here:
| Number of Shares | Weighted Average Grant-Date Fair Value | |||||||
| Unvested at January 1, 2022 | — | $ | — | |||||
| Granted | 85,998 | $ | 6.83 | |||||
| Converted from RSUs | 1,979,002 | $ | 32.27 | |||||
| Unvested at September 30, 2022 | 2,065,000 | $ | 31.21 | |||||
| 21 |
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
During the nine months ended September 30, 2022, the Company awarded 85,998 performance-based RSAs under the 2019 Equity Plan to employees, which are impairmenteligible to vest upon the successful completion of specified milestones related to added infrastructure capacity and financial targets over the performance period ending on December 31, 2023.
The value of performance-based RSAs is measured based on their fair value on the date of grant and amortized over their respective estimated implicit service periods.
As of September 30, 2022, there was approximately $17.9 million of total unrecognized compensation cost related to performance-based RSUs and RSAs, which is expected to be recognized over a remaining weighted-average vesting period of approximately six months.
Service-based RSUs
A summary of the Company’s unvested service-based RSUs for the nine months ended September 30, 2022 is presented here:
| Number of Shares | Weighted Average Grant-Date Fair Value | |||||||
| Unvested at January 1, 2022 | 610,561 | $ | 5.93 | |||||
| Vested | (788,636 | ) | $ | 7.48 | ||||
| Granted | 912,142 | $ | 9.08 | |||||
| Forfeited | (20,705 | ) | $ | 9.11 | ||||
| Converted to RSAs | (136,463 | ) | $ | 14.50 | ||||
| Unvested at September 30, 2022 | 576,899 | $ | 8.17 | |||||
The value of service-based RSUs is measured based on their fair value on the date of grant and amortized over their respective vesting periods. During the nine months ended September 30, 2022, the fair value of RSUs granted totaled $8.3 million.
During the nine months ended September 30, 2022, 136,463 unvested service-based RSUs were converted into an equivalent number of service-based RSAs with substantially the same terms as the performance-based RSU agreements they replaced.
Service-based RSAs
A summary of the Company’s unvested service-based RSAs for the nine months ended September 30, 2022 is presented here:
| Number of Shares | Weighted Average Grant-Date Fair Value | |||||||
| Unvested at January 1, 2022 | — | $ | — | |||||
| Vested | (9,375 | ) | $ | 20.09 | ||||
| Granted | 10,286,202 | $ | 6.73 | |||||
| Converted from RSUs | 136,463 | $ | 14.50 | |||||
| Unvested at September 30, 2022 | 10,413,290 | $ | 6.84 | |||||
The value of service-based RSAs is measured based on their fair value on the date of grant and amortized over their respective vesting periods. During the nine months ended September 30, 2022, the fair value of awards granted totaled $69.3 million.
| 22 |
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
As of September 30, 2022, there was approximately $81.7 million of total unrecognized compensation cost related to unvested service-based RSUs and RSAs, which is expected to be recognized over a remaining weighted-average vesting period of approximately 1.2 years.
Other Common Stock Purchase Warrants:
As of September 30, 2022, XMS Capital Partners, LLC (“XMS”) held a warrant to purchase up to 63,000 shares of the Company’s common stock at a purchase price of $48.37 per share, issued as partial payment for advisory services provided in connection with the Company’s Whinstone Acquisition. The warrant can be exercised any time through August 12, 2026.
No warrants were issued during the nine months ended September 30, 2022.
Note 15. Fair Value Measurements
Assets and liabilities measured at fair value on a recurring basis:
The Company’s assets and liabilities measured at fair value on a recurring basis consisted of the following as of September 30, 2022, and December 31, 2021:
| Fair value measured at September 30, 2022 | ||||||||||||||||
| Total carrying value at September 30, 2022 | Quoted prices in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||
| Derivative asset | $ | 112,944 | $ | — | $ | — | $ | 112,944 | ||||||||
| Contingent consideration liability | $ | 39,996 | $ | — | $ | — | $ | 39,996 | ||||||||
| Fair value measured at December 31, 2021 | ||||||||||||||||
| Total carrying value at December 31, 2021 | Quoted prices in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||
| Derivative asset | $ | 26,079 | $ | — | $ | — | $ | 26,079 | ||||||||
| Contingent consideration liability | $ | 83,928 | $ | — | $ | — | $ | 83,928 | ||||||||
Level 3 Assets:
Power Supply Agreement
During the year ended December 31, 2021, the Company recorded a derivative asset related to its Power Supply Agreement with TXU Energy Retail Company LLC (“TXU”), the energy supplier to the Company’s Rockdale Facility (the “Power Supply Agreement”). The Power Supply Agreement was classified as a derivative asset and measured at fair value on the date of the Company’s acquisition of Whinstone, with changes in fair value recognized in change in fair value of derivative asset in operating income or loss on the accompanying unaudited condensed consolidated statements of operations. The derivative was not designated as a hedging instrument. Prior to the Whinstone Acquisition, the Company did not have any contracts classified as derivative instruments. The estimated fair value of the Company’s derivate asset is classified in Level 3 of the fair value hierarchy due to the significant unobservable inputs utilized in the valuation. Specifically, our discounted cash flow estimation models contain quoted commodity exchange spot and forward prices and are adjusted for basis spreads for load zone-to-hub differentials through the term of the Power Supply Agreement, which ends in April 2030. The discount rate utilized of approximately 21% includes observable market inputs, but also includes unobservable inputs based on qualitative judgment related to company-specific risk factors.
| 23 |
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The terms of the Power Supply Agreement require margin-based collateral for both TXU and the Company, calculated as exposure resulting from fluctuations in the market cost rate of electricity versus the fixed price stated in the contract. The margin-based collateral requirement of the Company was zero as of September 30, 2022 and December 31, 2021.
Level 3 Liabilities:
Business Combination Contingent Consideration
The Company recorded a Level 3 financial liability during the year ended December 31, 2021, relating to the contingent consideration arrangement arising from the acquisition of Whinstone. Contingent consideration represents an obligation of the Company to transfer cash to the Whinstone Seller when Whinstone realizes or receives a benefit from utilization of certain defined power credits. The Company estimated the fair value of the contingent consideration using a discounted cash flow analysis, which includes estimates of both the timing and amounts of potential future power credits. These estimates were determined using the Company’s historical consumption quantities and patterns combined with management’s expectations of its future consumption requirements, which require significant judgment and depend on various factors outside the Company’s control, such as construction delays. The discount rate of approximately 2.5% includes observable market inputs, such as TXU’s parent company’s Standard & Poor’s credit rating of BB, but also includes unobservable inputs such as interest rate spreads, which were estimated based on qualitative judgment related to company-specific risk factors. Specifically, due to the power credits being subordinated obligations for TXU’s parent, we used one credit rating lower than BB in our yield curve to estimate a reasonable interest rate spread to determine the cost of debt input. The significant assumptions used to estimate fair value of the derivative contract include a discount rate of 21%, which reflected the nature of the contract as it relates to the risk and uncertainty of the estimated future mark-to-market adjustments, forward price curves of the power supply, broker/dealer quotes and other similar data obtained from quoted market prices or independent pricing vendors. Although these estimates are based on management’s best knowledge of current events, the estimates could change significantly from period to period. Actual results that differ from the assumptions used and any changes to the significant assumptions and unobservable inputs used could have a material impact on future results of operations.
Changes in Level 3 assets and liabilities measured at fair value on a recurring basis:
Unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category. Unrealized gains and losses recognized on inventories of $453,000, equipment and furnishings of $29,000, identifiable intangible assets of $1,833,000, goodwill of $430,000, and a $9,000, net expense from all other items, all associated with the assetsasset within the Level 3 category includes changes in fair value that were attributable to unobservable (e.g., changes in unobservable long-dated volatilities) inputs.
The following table presents the changes in the estimated fair value of the derivative asset measured using significant unobservable inputs (Level 3) for the nine months ended September 30, 2022 and operations of BDI. 2021:
| 2022 | 2021 | |||||||
| Balance as of January 1 | $ | 26,079 | $ | — | ||||
| Acquisition of Whinstone | — | 13,967 | ||||||
| Change in fair value | 86,865 | 23,806 | ||||||
| Balance as of September 30 | $ | 112,944 | $ | 37,773 | ||||
For the three and nine months ended September 30, 2016 the loss from discontinued operations of $236,000, consisted of revenues of $2,000, less operating and other expenses totaling $238,000, including amortization and depreciation of $24,000. Additional costs associated with the exit of operations of the Company's subsidiary BDI may be incurred as strategic options for BDI are evaluated.
| 24 |
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table presents the changes in the estimated fair value of our liability for the remainder of its original term. During May 2017, an agreement with the subsidiary's landlord was reached to terminate the lease by surrendering the facility in May 2017, making a $80,419 prepayment of rent through July 31, 2017 and surrendering the $37,000 lease deposit. Rent expensecontingent consideration measured using significant unobservable inputs (Level 3) for the nine months ended September 30, 2017 totaled approximately $229,000,2022 and 2021:
| 2022 | 2021 | |||||||
| Balance as of January 1 | $ | 83,928 | $ | — | ||||
| Acquisition of Whinstone | — | 82,953 | ||||||
| Change in contingent consideration | (44,108 | ) | — | |||||
| Change in fair value | 176 | 444 | ||||||
| Balance as of September 30 | $ | 39,996 | $ | 83,397 | ||||
For the three and nine months ended September 30, 2022, the change in Level 3 liabilities measured at fair value was zero and $0.2 million, respectively. For the three and nine months ended September 30, 2021, the change in Level 3 liabilities measured at fair value was $0.3 million and $0.4 million, respectively. The Company’s estimated liability for contingent consideration represents potential payments of additional consideration for the Whinstone Acquisition, payable if Whinstone realizes or receives a benefit from utilization of certain defined power credits. Changes in the fair value of contingent consideration are recorded in the unaudited condensed consolidated statements of operations within change in fair value of contingent consideration.
There were no transfers of financial instruments between any of Level 1, Level 2 or Level 3 during the periods presented.
Assets and Liabilities Not Measured at Fair Value on a Recurring Basis:
In addition to assets and liabilities that are measured at fair value on a recurring basis, we also measure certain assets and liabilities at fair value on a nonrecurring basis. Our non-financial assets, including $216,000intangible assets, operating lease right of use assets, and property, plant and equipment, are measured at fair value when there is an indication of impairment and the carrying amount exceeds the asset’s projected undiscounted cash flows. These assets are recorded at fair value only when an impairment charge is recognized.
At September 30, 2022, the fair values of cash and cash equivalents, accounts receivable, costs and estimated earnings in rent expense for BDI, inclusiveexcess of billings, prepaid expenses and other current assets, accounts payable, billings in excess of costs and estimated earnings, accrued compensation and accrued expenses approximated their carrying values because of the paymentshort term nature of these instruments.
Bitcoin held are accounted for as intangible assets with indefinite useful lives. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of Bitcoin at the time its fair value is being measured. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the early termination fee andasset. Subsequent reversal of impairment losses is not permitted. The carrying value of our Bitcoin assets at September 30, 2022 of $125.2 million reflects the surrender$132.1 million of impairment charges we recorded against the $37,000 lease deposit and $13,000 in rent expense incurred by the Company under short-term rent agreements. The Company’s rent expense forcarrying value of our Bitcoin assets during the nine months ended September 30, 2016 was immaterial.
Applying the sale of its corporate headquarters, land, building and certain fixtures and equipment to a third party at a purchasemarket price of $4,053,000. The saleone Bitcoin on September 30, 2022 of approximately $19,432 to the Company’s 6,766 Bitcoin held results in an estimated fair value of the Company’s Bitcoin of $131.5 million as of September 30, 2022. Applying the market price of one Bitcoin on December 31, 2021 of approximately $46,306 to the Company’s 4,884 Bitcoin held as of December 31, 2021, resulted in a gainan estimated fair value of approximately $1,933,000$226.2 million. The fair value of Bitcoin is based on Level 1 inputs.
| 25 |
Riot Blockchain, Inc. and generated approximately $1,799,000 in net cash after expensesSubsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 16. Commitments and mortgage payoffs. Contingencies
Commitments:
Operating Leases:
The Company is renting space in the buildingleases its primary office locations, manufacturing facilities and data center hosting facilities, as well as a ground lease, under short-termnoncancelable lease agreements that provideexpire on varying dates through 2032. See Note 12. “Leases” to these unaudited Notes to Condensed Consolidated Financial Statements.
Water Reservation Agreement:
Whinstone executed a water reservation agreement in April 2021 with the lessor of the ground lease to obtain a certain storage space.
The Company concluded that the agreement was not a lease or a derivative instrument. Because the Company obtained an additional right of use for the reserved non-potable cooling water amount, and the charges were increased by a standalone price commensurate with one officer providing aggregate annual minimum commitments totaling approximately $272,000. the additional non-potable cooling water use rights and at market rates, the water reservation agreement was determined to be a lease modification accounted for as a separate contract. As such, the fees of the water reservation agreement were excluded from the lease payments of the ground lease and the water reservation agreement was accounted for as a separate executory contract.
Contingencies:
Legal Proceedings:
The agreement contains customary confidentialityCompany, and benefit provisions.
Northern Data Working Capital Dispute
Riot Blockchain, Inc. v. Northern Data AG. On September 7, 2022, the Company filed a complaint against Northern Data AG, a company organized under the laws of Germany (“Northern Data”) in the Court of Chancery of the State of Delaware for, among other things, breach of contract. The complaint alleges Northern Data breached the terms of the Stock Purchase Agreement (the “SPA”), entered into, as of April 8, 2021, with Riot for the purchase of Whinstone by, among other things, refusing to engage in a contractually prescribed process to resolve disputes over the acquisition price of Whinstone. Riot believes it is owed over $100 million for liabilities that Northern Data failed to disclose to Riot in its pre-closing calculations. Riot has attempted to resolve the dispute, and, as a result of Northern Data’s refusal to engage in the dispute resolution process, seeks an order affirmatively declaring that Riot may terminate discussions and that unresolved matters, including the dispute regarding the over $100 million in liabilities Northern Data failed to disclose, must be submitted to an independent accounting firm for final resolution.
On September 27, 2022, Northern Data filed its Answer, Affirmative Defenses, and Verified Counterclaims and Third-Party Claims, which claim that Riot and Whinstone breached the SPA by allegedly failing to timely remit to Northern Data certain energy credit payments and that Riot is improperly seeking to introduce indemnification claims into the contractual process to resolve the parties’ dispute over purchase price. Northern Data alleges that there are approximately $40 million in energy credits that remain unpaid. Northern Data seeks damages in an unspecified amount, a declaration that Riot may not withhold payments for energy credits pending the resolution of the purchase price dispute, and specific performance that Riot may not introduce indemnification claims in connection with the process to resolve the purchase price dispute.
| 26 |
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Whinstone Customer Dispute
On June 13, 2022, GMO Gamecenter USA, Inc., a California corporation, and GMO Internet, Inc., a corporation organized and existing under the laws of Tokyo, Japan (collectively “GMO”), filed a complaint against Whinstone US, Inc. in the Supreme Court of the State of New York, County of New York: Commercial Division, Index No.: 656762/2022, subsequently removed to the United States District Court, S.D.N.Y., Case No. 1:22-cv-05974-JPC (the “Complaint”). After extensive discussions and upon Whinstone demanding that GMO reasonably negotiate a new hosting agreement in good faith pursuant to the terms of its existing agreement, GMO filed the Complaint. GMO alleges Whinstone breached the terms of the Colocation Services Agreement between GMO and Whinstone by failing to indemnify GMO for certain contractual loss of profit and causing certain other damages to GMO in the nature of loss of revenue, lost profits and loss of savings. GMO is seeking – without substantiation - compensatory damages in excess of $50 million, and pre-judgment and post-judgment interest. Whinstone’s Answer and Counterclaims were filed on August 22, 2022, and on September 12, 2022, GMO filed its answer and affirmative defenses to counterclaims raised by Whinstone, which included additional claims against Whinstone, as permitted under the applicable local rules. Subsequent to the period ended September 30, 2022, on November 1, 2022, Whinstone filed supplementary answers and counterclaims to GMO’s answer and affirmative defenses. Whinstone denies the substantive allegations of the Complaint and has asserted counterclaims seeking a declaratory judgment of GMO’s failure to negotiate in good faith in accordance with the terms of the Colocation Services Agreement, as well as compensatory damages in excess of $25 million, including damages from loss of revenue, breach of contract, pre- and post-judgment interest, and attorneys’ fees and costs in connection with GMO’s breach of the Colocation Services Agreement. The Company intends to vigorously defend Whinstone against GMO’s claims, and to vigorously enforce Whinstone’s claims against GMO.
Class Actions and Related Claims
On February 17, 2018, Creighton Takata filed an action asserting putative class action claims on behalf of the Company’s stockholders in the United District Court for the District of New Jersey, Takata v. Riot Blockchain Inc., et al., Case No. 3: 18-cv-02293. On April 18, 2018, Joseph J. Klapper, Jr., filed a complaint against Riot Blockchain, Inc., and certain of its officers and directors in the United District Court for the District of New Jersey, Klapper v. Riot Blockchain Inc., et al., Case No. 3: 18-cv-8031. The complaints contained substantially similar allegations, asserting violations of federal securities laws under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 on behalf of a putative class of stockholders that purchased stock from November 13, 2017 through February 15, 2018. The complaints alleged that the Company and certain of its officers and directors made, caused to be made, or failed to correct false and/or misleading statements in press releases and public filings regarding its business plan in connection with its cryptocurrency business. The complaints request damages in unspecified amounts, costs and fees of bringing the action, and other unspecified relief.
On November 6, 2018, the court in the Takata action issued an order consolidating Takata with Klapper into a single putative class action. On April 30, 2020, the court granted Defendants’ motions to dismiss the consolidated complaint, which resulted in the dismissal of all claims without prejudice.
On December 24, 2020, Lead Plaintiff filed another amended complaint. On April 8, 2022, the court again granted Defendants’ motions to dismiss the operative complaint without prejudice. On May 27, 2022, Lead Plaintiff filed the third amended consolidated complaint. Defendants submitted motions to dismiss on July 18, 2022. Briefing on the motions to dismiss was completed in October 2022.Because this litigation is still at this early stage, we cannot reasonably estimate the likelihood of an unfavorable outcome or the magnitude of such an outcome, if any.
Shareholder Derivative
In 2018, five shareholder derivative actions were filed on behalf of the Company. The complaints in each of these actions contain allegations similar to the allegations set forth in the shareholder class action complaint pending in the United States District Court for the District of New Jersey and seek recovery against the Company and certain of the Company’s officers and directors and an investor for alleged claims including breaches of fiduciary duty, aiding and abetting breaches of fiduciary duty, unjust enrichment, waste of corporate assets, abuse of control, and mismanagement. Each of the complaints also seek unspecified monetary damages and corporate governance changes. All of the cases have been stayed pending resolution of the motion to dismiss in the securities class action pending in the United States District Court for the District of New Jersey, except for one matter (Jackson v. Riot Blockchain, Inc., et al., Case No. 604520/18, Supreme Court of the State of New York, County of Nassau) in which the court has adjourned the preliminary conference until February 7, 2023 in lieu of staying the action. Defendants do not anticipate any other activity on this case until the next preliminary conference.
Defendants intend to vigorously contest plaintiffs’ allegations in the shareholder derivative actions and plaintiffs’ right to bring the action in the name of Riot Blockchain. As this litigation is still at an early stage, we cannot reasonably estimate the likelihood of an unfavorable outcome or the magnitude of such an outcome, if any.
| 27 |
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 17. Segment Information
The Company applies ASC 280, Segment Reporting, in determining its reportable segments. The Company has three reportable segments: Mining, Data Center Hosting, and Engineering. The guidance requires that segment disclosures present the measure(s) used by the CODM to decide how to allocate resources and for purposes of assessing such segments’ performance. The Company’s CODM is comprised of several members of its executive management team who use revenue and cost of revenues of our three reporting segments to assess the performance of the business of our reportable operating segments.
No operating segments have been aggregated to form the reportable segments. The Company does not allocate all assets to the reporting segments as these are managed on an entity-wide basis. Therefore, the Company does not separately disclose the total assets of its reportable operating segments.
The Mining segment generates revenue from the Bitcoin the Company earns through its mining activities. The Data Center Hosting segment generates revenue from long-term customer contracts for the provision/consumption of electricity, construction of infrastructure, operation of data centers and maintenance/management of computing capacity from the Company’s data center facility in Rockdale, Texas. The Engineering segment generates revenue through customer contracts for custom engineered electrical products.
The Data Center Hosting segment purchases custom engineered electrical products from the Engineering segment in the ordinary course of business. Effective January 1, 2022, the Mining segment entered into a colocation services agreement with the Data Center Hosting segment whereby the Mining segment is charged a base colocation fee per miner deployed at Whinstone plus a performance fee calculated as a percentage of gross mining profit. The revenue and cost of revenues from intersegment transactions have been eliminated in the consolidated statements of operations in accordance with U.S. GAAP. For purposes of segment reporting, the revenues and cost of revenues for each segment are presented in the table below on a stand-alone basis, with the intersegment eliminations presented separately, such that total revenue and total cost of revenues total to the consolidated statements of operations. All other revenues are from external customers. No single third-party customer or related group of third-party customers contributed 10% or more of the Company’s total consolidated revenue during the three and nine months ended September 30, 2022 and 2021. However, three customers accounted for nearly all of the Company’s third-party Data Center Hosting revenue.
For the three months ended September 30, 2022, approximately 98% of the Company’s mining revenue was generated from our Rockdale Facility in Rockdale, Texas, and the remaining 2% was generated from the Coinmint Facility. For the nine months ended September 30, 2022, approximately 71% of the Company’s mining revenue was generated from our Rockdale Facility in Rockdale, Texas, and the remaining 29% was generated from the Coinmint Facility in New York. During the nine months ended September 30, 2022, the Company terminated its agreement with Coinmint effective July 8, 2022.
| 28 |
Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table details revenue and cost of revenues for the Company’s reportable segments for the three and nine months ended September 30, 2022 and 2021, and reconciles to net income (loss) on the unaudited condensed consolidated statements of operations:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Reportable segment revenue, net: | ||||||||||||||||
| Mining | $ | 22,070 | $ | 53,590 | $ | 126,166 | $ | 108,213 | ||||||||
| Data Center Hosting | 23,624 | 11,193 | 68,240 | 14,067 | ||||||||||||
| Engineering | 20,300 | — | 55,050 | — | ||||||||||||
| Other revenue | 25 | 25 | 73 | 73 | ||||||||||||
| Eliminations | (19,729 | ) | — | (50,505 | ) | — | ||||||||||
| Total segment and consolidated revenue | 46,290 | 64,808 | 199,024 | 122,353 | ||||||||||||
| Reportable segment cost of revenues (exclusive of depreciation and amortization shown below): | ||||||||||||||||
| Mining | 15,949 | 13,034 | 60,793 | 29,893 | ||||||||||||
| Data Center Hosting | 28,201 | 12,581 | 75,705 | 16,317 | ||||||||||||
| Engineering | 16,767 | — | 47,302 | — | ||||||||||||
| Eliminations | (18,237 | ) | — | (47,138 | ) | — | ||||||||||
| Total segment and consolidated cost of revenues (exclusive of depreciation and amortization shown below) | 42,680 | 25,615 | 136,662 | 46,210 | ||||||||||||
| Reconciling Items: | ||||||||||||||||
| Acquisition-related costs | — | (552 | ) | (78 | ) | (18,894 | ) | |||||||||
| Selling, general and administrative | (16,004 | ) | (40,307 | ) | (37,549 | ) | (47,971 | ) | ||||||||
| Depreciation and amortization | (26,559 | ) | (12,207 | ) | (61,366 | ) | (20,791 | ) | ||||||||
| Change in fair value of derivative asset | (17,749 | ) | 7,413 | 86,865 | 23,806 | |||||||||||
| Power curtailment credits | 13,070 | 2,507 | 21,328 | 3,650 | ||||||||||||
| Change in fair value of contingent consideration | — | (259 | ) | (176 | ) | (444 | ) | |||||||||
| Realized gain on sale/exchange of Bitcoin | 1,854 | 65 | 25,443 | 94 | ||||||||||||
| Gain on exchange of equipment | 7,667 | — | 16,281 | — | ||||||||||||
| Impairment of Bitcoin | (5,900 | ) | — | (132,077 | ) | (17,507 | ) | |||||||||
| Impairment of goodwill | — | — | (335,648 | ) | — | |||||||||||
| Interest income (expense) | 348 | 40 | (9 | ) | 295 | |||||||||||
| Realized loss on sale of marketable equity securities | — | — | (1,624 | ) | — | |||||||||||
| Realized gain on sale/exchange of long-term investment | — | — | — | 26,260 | ||||||||||||
| Unrealized gain (loss) on marketable equity securities | 142 | (11,151 | ) | (6,306 | ) | (10,812 | ) | |||||||||
| Other income (expense) | — | (85 | ) | (59 | ) | 1,425 | ||||||||||
| Current income tax benefit (expense) | (89 | ) | — | (828 | ) | — | ||||||||||
| Deferred income tax benefit (expense) | 3,041 | — | 9,667 | (3,730 | ) | |||||||||||
| Net income (loss) | $ | (36,569 | ) | $ | (15,343 | ) | $ | (353,774 | ) | $ | 11,524 | |||||
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Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 18. Revisions of Previously Issued Financial Statements
As noted in Note 4. “Acquisitions”, on May 26, 2021, the Company acquired 100% of the equity interests of Whinstone. The Whinstone Acquisition was accounted for using the acquisition method of accounting in accordance with ASC 805, Business Combinations, which requires recognition of assets acquired and liabilities assumed at their respective fair values on the date of acquisition. During the third quarter of 2022, the Company discovered a classification error in its reported allocation of acquisition date fair value to property and equipment, which resulted in an understatement of property and equipment and an equal overstatement of goodwill as of the balance sheet dates outlined below.
In accordance with Staff Accounting Bulletin (“SAB”) 99, Materiality, and SAB 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, the Company evaluated the materiality of the error from qualitative and quantitative perspectives, and concluded that the error was immaterial to any prior annual or interim financial statements. Notwithstanding this conclusion, management has revised the accompanying condensed consolidated financial statements and related notes included herein to correct this error for all periods presented.
The following tables present the effect of correcting this error on the Company’s previously issued financial statements. There were no changes to the statements of stockholders’ equity that have not otherwise been reflected in the balance sheets and statements of operations as detailed in the tables below.
| As of June 30, 2021 | ||||||||||||
| Condensed Consolidated Balance Sheet | As previously reported | Adjustment | As revised | |||||||||
| Property & equipment, net | $ | 128,815 | $ | 13,500 | $ | 142,315 | ||||||
| Goodwill | 267,409 | (13,500 | ) | 253,909 | ||||||||
| Total assets | 906,369 | — | 906,369 | |||||||||
| As of September 30, 2021 | ||||||||||||
| Condensed Consolidated Balance Sheet | As previously reported | Adjustment | As revised | |||||||||
| Property & equipment, net | $ | 200,751 | $ | 13,500 | $ | 214,251 | ||||||
| Goodwill | 267,237 | (13,500 | ) | 253,737 | ||||||||
| Total assets | 954,407 | — | 954,407 | |||||||||
| As of December 31, 2021 | ||||||||||||
| Consolidated Balance Sheet | As previously reported | Adjustment | As revised | |||||||||
| Property & equipment, net | $ | 262,980 | $ | 13,500 | $ | 276,480 | ||||||
| Goodwill | 349,063 | (13,500 | ) | 335,563 | ||||||||
| Total assets | 1,530,939 | — | 1,530,939 | |||||||||
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Riot Blockchain, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| As of March 31, 2022 | ||||||||||||
| Condensed Consolidated Balance Sheet | As previously reported | Adjustment | As revised | |||||||||
| Property & equipment, net | $ | 325,132 | $ | 13,500 | $ | 338,632 | ||||||
| Goodwill | 349,148 | (13,500 | ) | 335,648 | ||||||||
| Total assets | 1,549,755 | — | 1,549,755 | |||||||||
| As of June 30, 2022 | ||||||||||||
| Condensed Consolidated Balance Sheet | As previously reported | Adjustment | As revised | |||||||||
| Property & equipment, net | $ | 411,244 | $ | 13,500 | $ | 424,744 | ||||||
| Goodwill | — | — | — | |||||||||
| Total assets | 1,436,225 | 13,500 | 1,449,725 | |||||||||
| Accumulated deficit | (568,543 | ) | 13,500 | (555,043 | ) | |||||||
| Total stockholders’ equity | 1,288,565 | 13,500 | 1,302,065 | |||||||||
| Total liabilities and stockholders’ equity | 1,436,225 | 13,500 | 1,449,725 | |||||||||
| Three Months Ended June 30, 2022 | ||||||||||||
| Condensed Consolidated Statement of Operations | As previously reported | Adjustment | As revised | |||||||||
| Impairment of goodwill | $ | 349,148 | $ | (13,500 | ) | $ | 335,648 | |||||
| Total costs and expenses | 438,960 | (13,500 | ) | 425,460 | ||||||||
| Operating income (loss) | (366,013 | ) | 13,500 | (352,513 | ) | |||||||
| Net income (loss) before taxes | (372,533 | ) | 13,500 | (359,033 | ) | |||||||
| Net income (loss) | (366,334 | ) | 13,500 | (352,834 | ) | |||||||
| Basic net income (loss) per share | (2.81 | ) | 0.10 | (2.71 | ) | |||||||
| Diluted net income (loss) per share | (2.81 | ) | 0.10 | (2.71 | ) | |||||||
| Six Months Ended June 30, 2022 | ||||||||||||
| Condensed Consolidated Statement of Operations | As previously reported | Adjustment | As revised | |||||||||
| Impairment of goodwill | $ | 349,148 | $ | (13,500 | ) | $ | 335,648 | |||||
| Total costs and expenses | 480,838 | (13,500 | ) | 467,338 | ||||||||
| Operating income (loss) | (328,104 | ) | 13,500 | (314,604 | ) | |||||||
| Net income (loss) before taxes | (336,592 | ) | 13,500 | (323,092 | ) | |||||||
| Net income (loss) | (330,705 | ) | 13,500 | (317,205 | ) | |||||||
| Basic net income (loss) per share | (2.67 | ) | 0.11 | (2.56 | ) | |||||||
| Diluted net income (loss) per share | (2.67 | ) | 0.11 | (2.56 | ) | |||||||
| Six Months Ended June 30, 2022 | ||||||||||||
| Condensed Consolidated Statement of Cash Flows | As previously reported | Adjustment | As revised | |||||||||
| Net income (loss) | $ | (330,705 | ) | $ | 13,500 | $ | (317,205 | ) | ||||
| Impairment of goodwill | 349,148 | (13,500 | ) | 335,648 | ||||||||
| Net cash used in operating activities | (14,393 | ) | — | (14,393 | ) | |||||||
| 31 |
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our unaudited condensed interim consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report and with our audited consolidated financial statements for the fiscal year ended December 31, 2021, as included in our 2021 Annual Report. In addition to historical consolidated financial information, the following discussion includes forward-looking statements about our business, financial condition and results of operations, including discussions about management’s expectations for our business. These statements represent projections, beliefs and expectations based on current circumstances and conditions and our actual results could differ materially from those discussed in these forward-looking statements. Further, these forward-looking statements should not be construed either as assurances of performance or as promises of a given course of action. You should review the sections of this Quarterly Report entitled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of factors that could cause actual results to differ materially – and potentially adversely – from the results described in or implied by the forward-looking statements contained in the following discussion and analysis and elsewhere in this Quarterly Report.
Business Overview:
We are a vertically integrated Bitcoin mining company principally engaged in enhancing our capabilities to mine Bitcoin. We also provide the critical mining infrastructure for our institutional-scale hosted clients to mine Bitcoin at our Rockdale Facility, with 700 megawatts in total capacity. Our Rockdale Facility is believed to be the largest Bitcoin mining facility in North America, as measured by developed capacity, and we are currently expanding its capacity. Additionally, we are beginning development of a second large-scale Bitcoin mining data center at our Corsicana Facility, which is expected to have approximately one gigawatt of available capacity for both our Bitcoin mining operations and hosting of institutional-scale Bitcoin mining and data center clients.
We operate in an environment which is consistently evolving based on the proliferation of Bitcoin and cryptocurrencies in general. A significant component of our strategy is to effectively and efficiently allocate capital among opportunities that generate the highest return on our capital.
Industry Trends
During 2022, we observed a number of companies in the Bitcoin ecosystem experience significant challenges and failure due to the precipitous decline in the price of Bitcoin. We anticipate this trend will likely continue as companies attempt to shift their business models to operate on compressed margins. The dramatic increase in the price of Bitcoin observed in the market during the last few years caused many companies to over-leverage themselves, operating in an unsustainable way given the recent instability in the price of Bitcoin. Despite challenges in the ecosystem, Riot continues to focus on building long-term stockholder value by taking strategic action to vertically integrate, expanding the Rockdale Facility and developing our Corsicana Facility. As we grow our business, we continue to focus on deploying our efficient mining fleet, at scale, while realizing benefit of being an owner and operator of our Bitcoin mining facilities.
We anticipate that other companies in the industry will continue to experience challenges, and the end of 2022 and the start of 2023 will continue to be a period of consolidation in the Bitcoin mining industry, and we believe that, given our relative position, liquidity and absence of long-term debt, in the competitive landscape, we are likely positioned to benefit from this consolidation. As a result of any strategic action undertaken by us, our business and financial results may change significantly. We are continuously evaluating strategic opportunities which we may decide to undertake as part of our strategic growth initiatives; however, we can offer no assurances that any strategic opportunities which we decide to undertake will be achieved on the schedule or within the budget we anticipate, if at all, in our competitive and evolving industry. See Part I, Item 1A. “Risk Factors” of our 2021 Annual Report for additional discussion regarding potential impacts our competitive and evolving industry may have on our business.
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Bitcoin Mining
The Company’s current focus is on its mining operation, and basisduring the nine months ended September 30, 2022, we continued to deploy miners at our Rockdale Facility and continued development activities at the Corsicana Facility, with the objective of presentation:increasing the Company’s operational efficiency and performance.
As of September 30, 2022, our Mining business operated approximately 55,728 ASIC miners, with a hash rate capacity of approximately 5.6 exahash per second (“EH/s”). During the nine months ended September 30, 2022, we mined 3,842 Bitcoin, which represented an increase of 36% over the 2,458 Bitcoin we mined during the nine months ended September 30, 2021. Based on our existing operations and expected deliveries of miners pursuant to our purchase orders with their manufacturer, Bitmain, we anticipate having approximately 115,450 miners in operation, with a hash rate capacity of approximately 12.5 EH/s by the first quarter of 2023.
During the three months ended September 30, 2022, we fully exited our Mining operations at the Coinmint Facility. We believe this transition will lower our overall cost of revenues for the Mining business as new miners will be deployed at the Rockdale Facility. See Note 8. “Property and Equipment” to these unaudited Notes to Condensed Consolidated Financial Statements.
Our Bitcoin mining operations are subject to unique industry risks such as the historical volatility in the demand for, and price of, Bitcoin and changes in the public perception of Bitcoin.
Miner Purchases and negative cash flows from operations. Deployments
At September 30, 2017,2022, we had purchased, received and/or deployed the following miners:
| Number of miners | ||||
| Miners deployed at January 1, 2022 | 30,907 | |||
| Net miners deployed during the nine months ended September 30, 2022 | 24,821 | |||
| Miners received, but not yet deployed | 27,678 | |||
| Miners under contract, but not yet received | 32,044 | |||
| Total miners under contract, deployed or expected to be received, at September 30, 2022 | 115,450 | |||
As of September 30, 2022, the Company had approximate balancesoutstanding executed purchase agreements for the purchase of cashminers from Bitmain for a total of approximately 12,097 new model S19j Pro miners and cash equivalents19,947 new model S19XP miners, scheduled to be shipped through December 2022. Pursuant to these agreements, approximately $44.9 million remains payable to Bitmain in installments in advance of $13,140,000, working capitalshipment of $12,555,000, total stockholders' equitythe miners, which is scheduled to occur monthly through December 2022, subject to future adjustments as provided in the contracts.
To take advantage of $15,466,000our low-cost power supply agreement at the Company’s Rockdale Facility and eliminate third-party hosting fees, during the nine months ended September 30, 2022, the Company elected not to renew its co-location mining services agreement with Coinmint, which was, therefore, terminated automatically by its terms as of July 8, 2022.
COVID-19
The COVID-19 global pandemic has been unprecedented and unpredictable; its impact is likely to continue to result in significant national and global economic disruption, which may adversely affect our business. Based on our current assessment, however, we do not expect any material impact on our long-term development, our operations, or our liquidity due to the worldwide spread of COVID-19, other than the potential impact of COVID-19 on global logistics discussed below. We are actively monitoring this situation and the possible effects on our financial condition, liquidity, operations, suppliers, and industry.
In addition, nationally, we have experienced and are experiencing varying degrees of inflation, resulting in part from various supply chain disruptions, increased shipping and transportation costs, and increased raw material and labor costs, as well as other disruptions resulting from the continuing COVID-19 pandemic and general global economic conditions. This inflationary impact on our cost structure has contributed to adjustments in operations, ability to obtain materials and retain talent, despite a continued focus on reducing our costs where possible.
| 33 |
Global Logistics:
Global supply logistics have caused delays across all channels of distribution. Similarly, we have also experienced delays in certain of our miner delivery schedules and in our infrastructure development schedules due to constraints on the globalized supply chains for miners, electricity distribution equipment and construction materials. Through the date of this Quarterly Report, we have been able to effectively mitigate any delivery delays to avoid materially impacting our miner deployment schedule, however, there are no assurances we will be able to continue to mitigate any such delivery delays in the future. Additionally, the expansion of the Rockdale Facility and the development of our new Corsicana Facility requires large quantities of construction materials, specialized electricity distribution equipment and other component parts that can be difficult to source. We have procured and hold many of the required materials to help mitigate against global supply logistic and pricing concerns. We continue to monitor developments in the global supply chain and assess their potential impact on our expansion plans.
Summary of Mining Results
The following table presents additional information about our Mining activities, including Bitcoin production and sales of the Bitcoin the Company mined during the nine months ended September 30, 2022, and 2021 ($ in thousands):
| Quantities | ||||||||
| (in coins) | Amounts | |||||||
| Balance at January 1, 2022 | 4,884 | $ | 159,544 | |||||
| Revenue recognized from Bitcoin mined | 3,842 | 126,166 | ||||||
| Proceeds from sale of Bitcoin | (1,925 | ) | (52,491 | ) | ||||
| Exchange of Bitcoin for employee compensation | (35 | ) | (1,434 | ) | ||||
| Realized gain on sale/exchange of Bitcoin | — | 25,443 | ||||||
| Impairment of Bitcoin | — | (132,077 | ) | |||||
| Balance at September 30, 2022 | 6,766 | $ | 125,151 | |||||
| Quantities | ||||||||
| (in coins) | Amounts | |||||||
| Balance at January 1, 2021 | 1,078 | $ | 11,626 | |||||
| Revenue recognized from Bitcoin mined | 2,458 | 108,213 | ||||||
| Proceeds from sale of Bitcoin | — | — | ||||||
| Exchange of Bitcoin for employee compensation | (3 | ) | (113 | ) | ||||
| Realized gain on sale/exchange of Bitcoin | — | 94 | ||||||
| Impairment of Bitcoin | — | (17,507 | ) | |||||
| Balance at September 30, 2021 | 3,533 | $ | 102,313 | |||||
Results of Operations Comparative Results for the Three Months Ended September 30, 2022 and 2021:
Revenue:
For the three months ended September 30, 2022 and 2021, Mining revenue was $22.1 million, and $53.6 million, respectively. The decrease of $31.5 million was due to a lower number of Bitcoin mined of 1,042 in the 2022 period, as compared to 1,292 in the 2021 period, combined with lower Bitcoin values in the 2022 period, averaging $21,184 per coin as compared to $41,837 per coin in the 2021 period. The primary reason for the decrease in the number of Bitcoin mined was due to the Company’s effective employment of its proprietary power strategy to significantly reduce overall power costs. As noted below, during the three months ended September 30, 2022, the Company earned $13.1 million in power credits, to be credited against its power invoices, as a result of temporarily pausing its operations. The power credits equate to approximately 760 Bitcoin, as computed by using the average daily closing BTC prices on a monthly basis. During the three months ended September 30, 2021, the Company earned $2.5 million in power credits, or the equivalent of approximately 66 Bitcoin.
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For the three months ended September 30, 2022 and 2021, Data Center Hosting revenue was $8.4 million, and $11.2 million, respectively. The decrease of $2.8 million was due primarily to lower revenue share from customers due to the lower Bitcoin values in the 2022 period combined with lower customer billings due to Whinstone’s participation in ERCOT’s energy demand response programs. Data Center Hosting revenue includes upfront payments which we record as deferred revenue and generally recognize as services are provided. We provide energized space and operating and maintenance services to third-party mining companies who locate their mining hardware at our Rockdale Facility under long-term contracts. We account for these agreements as a single performance obligation for services being delivered in a series with delivery being measured by daily successful operation of the mining hardware. As such, we recognize revenue over the life of the contract as its series of performance obligations are met. The contracts are recognized in the amount for which we have the right to invoice because we elected the “right to invoice” practical expedient.
For the three months ended September 30, 2022, Engineering revenue was $15.8 million. There was no Engineering revenue for the three months ended September 30, 2021 as such date was prior to the acquisition of the Engineering segment. Engineering revenue is derived from the sale of custom products built to customers’ specifications under fixed-price contracts with one identified performance obligation. Engineering revenues are recognized over time as performance creates or enhances an accumulated deficit of $120,823,000. To date,asset with no alternative use, and for which the Company has in large part relied on equity financingan enforceable right to fund its operations. The Company expects to continue to incur losses from operations for the near-term and these losses could be significant as we incur costs and expenses associated with our recent and potential future acquisitions and investments, as well as public company and administrative related expenses are incurred and winding-down BDI’s operations. The Company believes its upcoming near-term cash needs relative to the recent acquisitions will be covered by cash acquired in the acquisitions combined with the Company’s available cash. The Company believes that its current working capital position will be sufficient to meet its estimated cash needs for at least a year and a day from this filing. The Company is closely monitoring its cash balances, cash needs and expense levels.
Costs and expenses:
Cost of revenues for Mining for the three months ended September 30, 2022 and 2021 was $14.7 million and $13.0 million, respectively, representing an increase of approximately $1.7 million. As a percentage of Mining revenue, cost of revenues totaled 66.5% and 24.3% for each of the three months ended September 30, 2022 and 2021, respectively. Cost of revenues consists primarily of direct production costs of mining operations, including electricity, labor, insurance and the variable Coinmint hosting fee, but excluding depreciation and amortization, which are separately stated. The increase of $1.6 million in cost of revenues was primarily due to the increase in mining capacity at the Rockdale Facility, which requires more headcount and direct costs necessary to maintain and support the mining operations. As noted below, during the three months ended September 30, 2022 and 2021, the Company appointedearned $13.1 million and $2.5 million, respectively, in power credits to be credited against its power invoices, as a new independent directorresult of temporarily pausing its operations. These credits are recognized in power curtailment credits in the statements of operations, outside of cost of revenues, but significantly reduce the Company’s overall cost to mine Bitcoin. When netting the power curtailment credits with the costs of revenues, the net costs as a percentage of Mining revenue were 38.8% and 24.3% for the three months ended September 30, 2022 and 2021, respectively.
Cost of revenues for Data Center Hosting for the three months ended September 30, 2022 and 2021 was $14.2 million and $12.6 million, respectively. The costs consisted primarily of direct power costs, with the balance primarily incurred for rent and compensation costs.
Cost of revenues for Engineering for the three months ended September 30, 2022 was $13.8 million. There were no engineering costs for the three months ended September 30, 2021 as such date was prior to the Boardacquisition of Directorsthe Engineering segment. The 2022 costs consisted primarily of direct materials and labor, as well as indirect manufacturing costs. The increase in cost of revenues was primarily due to the increase in headcount to support the Company’s growth combined with an increase in power costs.
Selling, general and administrative expenses during the three months ended September 30, 2022 and 2021 totaled $16.0 million and $40.3 million, respectively. Selling, general and administrative expenses consist of stock-based compensation, legal and professional fees and other personnel and related costs. The decrease of $24.3 million is primarily due to a decrease of $29.7 million in compensation-related expense due to the adoption of the Company’s performance-based stock plan in August 2021, partially offset by additional employees to support the Company’s growth, an increase in audit committee,and consulting fees of $1.9 million resulting primarily from assistance on internal control systems and procedures and information technology projects and an increase in other general operating costs, including rent, to support the Company’s growth.
Depreciation and amortization expenses during the three months ended September 30, 2022 totaled $26.6 million, an increase of approximately $14.4 million as compared to $12.2 million for the three months ended September 30, 2021. The increase was primarily due to higher depreciation expense recognized for the Rockdale Facility and our recently acquired miners.
Change in fair value of our derivative asset for the three months ended September 30, 2022 and 2021, was ($17.7) million and $7.4 million, respectively, and was recorded to adjust the fair value of our Power Supply Agreement, which resultedwas classified as a derivative asset and measured at fair value.
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Power curtailment credits for the three months ended September 30, 2022 and 2021, was $13.1 million and $2.5 million, respectively, and represents power sales into the ERCOT marketplace through Whinstone’s participation in ERCOT’s energy demand response programs.
Realized gain on sale/exchange of Bitcoin for the three months ended September 30, 2022 was $1.9 million. The realized gain or loss on sale/exchange of Bitcoin for the three months ended September 30, 2021 was nominal.
Gain on exchange of equipment for the three months ended September 30, 2022 was $7.7 million arising from the equipment exchange agreement with a third-party Bitcoin mining company. There was no gain on exchange of equipment during the three months ended September 30, 2021.
Impairment of Bitcoin for the three months ended September 30, 2022 was $5.9 million arising from the decline in Bitcoin prices. There was no impairment of Bitcoin recognized during the three months ended September 30, 2021.
Other income and expenses:
Other income for the three months ended September 30, 2022 was $0.5 million, and primarily consisted of interest and other income of $0.3 million and the unrealized gain on marketable equity securities of $0.1 million. Other expense for the three months ended September 30, 2021 was $11.2 million, which primarily related to the unrealized loss recognized due to the decline in the Company regaining compliance with the Rule.fair value of our marketable equity securities.
Results of Operations
Revenue:
For the nine months ended September 30, 2017 totaled $2,694,000, which is an approximately $639,000, or 19%, decrease2022 and 2021, Mining revenue was $126.2 million, and $108.2 million, respectively. The increase of $18.0 million was due to a higher number of Bitcoin mined of 3,842 in the 2022 period, as compared to the 2016 period. Compensation related expenses decreased by approximately $316,000 due to fewer employees and lower bonuses2,458 in the 2017 period. Legal and accounting expenses increased2021 period, partially offset by $204,000 for the 2017 period due to additional legal services on various matters and costs associated with a change in audit firms. A decrease in strategic evaluation costs of approximately $373,000 related to the completion of strategic evaluations in 2016. Commercialization and marketing related expenses decreased by approximately $133,000lower Bitcoin values in the 20172022 period, averaging $32,839 per coin as compared to $44,591 per coin in the Company had substantially wound down APPY1 commercialization activities in 2016. A decrease2021 period. The number of $48,000 in general operating expensesBitcoin mined during 2022 was duesignificantly impacted by the Company’s effective employment of its proprietary power strategy to the winding down of operations combined with the sale of Company’s facility in 2016.
For the nine months ended September 30, 2022 and 2021, Data Center Hosting revenue was $27.9 million, and $14.1 million, respectively. The $13.8 million increase was primarily due to the 2021 period only containing four months of Data Center Hosting revenue versus nine for the 2022 period. Data Center Hosting revenue includes upfront payments which we record as deferred revenue and generally recognize as services are provided. We provide energized space and operating and maintenance services to third-party mining companies who locate their mining hardware at our Rockdale Facility under long-term contracts. We account for these agreements as a single performance obligation for services being delivered in a series with delivery being measured by daily successful operation of the mining hardware. As such, we recognize revenue over the life of the contract as its series of performance obligations are met. The contracts are recognized in the amount for which we have the right to invoice because we elected the “right to invoice” practical expedient. The Data Center Hosting segment was acquired in May 2021, and therefore its results of operations are only included in the Company’s consolidated results of operations for four months during 2021 compared to nine in 2022.
For the nine months ended September 30, 2022, Engineering revenue was $44.9 million. There was no Engineering revenue for the nine months ended September 30, 2021 as such date was prior to the acquisition of the Engineering segment. Engineering revenue is derived from the sale of custom products built to customers’ specifications under fixed-price contracts with one identified performance obligation. Engineering revenues are recognized over time as performance creates or enhances an asset with no alternative use, and for which the Company has an enforceable right to receive compensation as defined under the contract.
Other revenue consisting of license fees was not significant in either period.
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Costs and expenses:
Cost of revenues for Mining for the nine months ended September 30, 2022 and 2021 was $51.8 million and $29.9 million, respectively, representing an increase of approximately $21.9 million. As a percentage of Mining revenue, cost of revenues totaled $63,000,41.0% and 27.6% for each of the nine months ended September 30, 2022 and 2021, respectively. Cost of revenues consists primarily of direct production costs of mining operations, including electricity, labor, insurance and the variable Coinmint hosting fee, but excluding depreciation and amortization, which are separately stated. The increase of $21.9 million in cost of revenues is primarily due to the increase in mining capacity at the Rockdale Facility, which requires more headcount and direct costs necessary to maintain and support the mining operations. As noted below, during the nine months ended September 30, 2022 and 2021, the Company earned $21.3 million and $3.7 million, respectively, in power credits, to be credited against its power invoices, as a result of temporarily pausing its operations. These credits are recognized in power curtailment credits in the statements of operations, outside of cost of revenues, but significantly reduce the Company’s overall cost to mine Bitcoin. When netting the power curtailment credits with the costs of revenues, the net costs as a percentage of Mining revenue were 34.6% and 27.6% for the nine months ended September 30, 2022 and 2021, respectively.
Cost of revenues for Data Center Hosting for the nine months ended September 30, 2022 and 2021 was $44.4 million and $16.3 million, respectively. The costs consisted primarily of direct power costs, with the balance primarily incurred for rent and compensation costs. Whinstone was acquired in May 2021, and therefore its results of operations are only included in the Company’s consolidated results of operations for four months during 2021 compared to nine in 2022.
Cost of revenues for Engineering for the nine months ended September 30, 2022 was $40.5 million. There were no Engineering costs for the nine months ended September 30, 2021 as such date was prior to the acquisition of the Engineering segment. The 2022 costs consisted primarily of direct materials and labor, as well as indirect manufacturing costs.
Acquisition-costs for the nine months ended September 30, 2022 were nominal. Acquisition-related costs for the nine months ended September 30, 2021, totaled $18.9 million, and consisted of expenses incurred in connection with our acquisition of Whinstone.
Selling, general and administrative expenses during the nine months ended September 30, 2022 and 2021 totaled $37.5 million and $48.0 million, respectively. Selling, general and administrative expenses consist of stock-based compensation, legal and professional fees and other personnel and related costs. The decrease of $10.5 million is primarily due to a decrease of $24.8 million in compensation-related expense due to the adoption of the performance-based stock plan in August 2021, partially offset by additional employees to support the Company’s growth, an increase in audit and consulting fees of $3.8 million resulting primarily from assistance on internal control systems and procedures and information technology projects, an increase in insurance expense of $1.2 million, and an increase in other general operating costs, including rent, to support the Company’s growth.
Depreciation and amortization expenses during the nine months ended September 30, 2022 totaled $61.4 million, an increase of approximately $436,000, or 87%, decrease$40.6 million as compared to $20.8 million for the 2016 period. Substantially allnine months ended September 30, 2021. The increase was primarily due to higher depreciation expense recognized for the Rockdale Facility and our recently acquired miners.
Change in fair value of our derivative asset for the nine months ended September 30, 2022 and 2021 was $86.9 million and $23.8 million, respectively, and was recorded to adjust the fair value of our Power Supply Agreement, which is classified as a derivative asset and measured at fair value.
Power curtailment credits for the nine months ended September 30, 2022 and 2021 was $21.3 million and $3.7 million, respectively, and represents power sales into the ERCOT marketplace through Whinstone’s participation in ERCOT’s energy demand response programs.
Realized gain on sale/exchange of Bitcoin for the nine months ended September 30, 2022 and 2021 was $25.4 million and $0.1 million, respectively.
Gain on exchange of equipment for the nine months ended September 30, 2022 was $16.3 million arising from the equipment exchange agreement with a third-party Bitcoin mining company. There was no gain on exchange of equipment during the nine months ended September 30, 2021.
Impairment of Bitcoin for the nine months ended September 30, 2022 and 2021 was $132.1 million and $17.5 million, respectively, arising from the decline in Bitcoin prices.
Impairment of goodwill for the nine months ended September 30, 2022 was $335.6 million arising from recent adverse changes in business climate, including decreases in the price of Bitcoin and increased volatility of equity markets, as evidenced by declines in the market price of the decreaseCompany’s securities, those of its peers, and major market indices. There was due to winding down developmentno impairment recognized during the nine months ended September 30, 2021.
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Other income and commercialization of APPY2 and APPY1 operations that had ceased in 2016.expenses:
Other expense for the nine months ended September 30, 2017 totaled $4,802,000, compared to $28,000 in2022 was $8.0 million and primarily consisted of the 2016 period. The interest expense inunrealized loss on marketable equity securities of $6.3 million and the 2017 period primarily related to the accrualrealized loss on sale of interest on the March 2017 convertible note offering combined with the interestmarketable equity securities of $1.6 million recognized in the period from the accretion of values allocated to the value of the warrants and the beneficial conversion feature computed upon the release of the securities from escrow. Interest in 2016, primarily related to the mortgage loans on the building that was paid off in the first quarter of 2016 upon the building’s sale. For the nine months ended September 30, 2017, the Company recorded investment income of approximately $83,000, compared to investment income of $103,000 in the 2016 period,connection with the difference resulting from an average lower invested balances and lower rates on average investments with shorter maturities.
Non-GAAP Measures
In addition to consolidated U.S. GAAP financial measures, we consistently evaluate our use of and calculation of the non-GAAP financial measures, “Adjusted EBITDA” and Adjusted earnings per share (“Adjusted EPS”). Adjusted EBITDA is a financial measure defined as our EBITDA, adjusted to eliminate the effects of certain non-cash and / or non-recurring items, that do not reflect our ongoing strategic business operations. EBITDA is computed as net income before interest, recognizedtaxes, depreciation, and amortization. Adjusted EBITDA is EBITDA further adjusted for certain income and expenses, which management believes results in a performance measurement that represents a key indicator of the Company’s core business operations of Bitcoin mining. The adjustments include fair value adjustments such as derivative power contract adjustments, equity securities value changes, and non-cash stock-based compensation expense, in addition to financing and legacy business income and expense items. The Company determined to exclude impairments and gains or losses on sales or exchanges of Bitcoin from our calculation of Adjusted Non-GAAP EBITDA for all periods presented.
Adjusted EPS is a financial measure defined as our EBITDA divided by our diluted weighted-average shares outstanding, adjusted to eliminate the effects of certain non-cash and / or non-recurring items, that do not reflect our ongoing strategic business operations. EBITDA is computed as net income before interest, taxes, depreciation, and amortization. Adjusted EPS is EBITDA further adjusted for certain income and expenses, which management believes results in a performance measurement that represents a key indicator of the Company’s core business operations of Bitcoin mining. The adjustments include fair value adjustments such as derivative power contract adjustments, equity securities value changes, and non-cash stock-based compensation expense, in addition to financing and legacy business income and expense items. The Company determined to exclude impairments and gains or losses on sales or exchanges of Bitcoin from our calculation of Adjusted Non-GAAP EPS for all periods presented.
We believe Adjusted EBITDA and Adjusted EPS can be important financial measures because they allow management, investors, and our board of directors to evaluate and compare our operating results, including our return on capital and operating efficiencies, from period-to-period by making such adjustments.
Adjusted EBITDA and Adjusted EPS are provided in addition to and should not be considered to be a substitute for, or superior to net income, the comparable measure under U.S. GAAP. Further, Adjusted EBITDA and Adjusted EPS should not be considered as an alternative to revenue growth, net income, diluted earnings per share or any other performance measure derived in accordance with U.S. GAAP, or as an alternative to cash flow from operating activities as a measure of our liquidity. Adjusted EBITDA and Adjusted EPS have limitations as analytical tools, and you should not consider such measures either in isolation or as substitutes for analyzing our results as reported under U.S. GAAP.
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Reconciliations of Adjusted EBITDA and Adjusted EPS to the most comparable U.S. GAAP financial metric for historical periods are presented in the period from the accretiontable below:
Reconciliation of values allocatedGAAP and Non-GAAP Financial Information
| Non-GAAP Adjusted EBITDA | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Net income (loss) | $ | (36,569 | ) | $ | (15,343 | ) | $ | (353,774 | ) | $ | 11,524 | |||||
| Interest (income) expense | (348 | ) | (40 | ) | 9 | (295 | ) | |||||||||
| Income tax expense (benefit) | (2,952 | ) | — | (8,839 | ) | 3,730 | ||||||||||
| Depreciation and amortization | 26,559 | 12,207 | 61,366 | 20,791 | ||||||||||||
| EBITDA | (13,310 | ) | (3,176 | ) | (301,238 | ) | 35,750 | |||||||||
| Adjustments: | ||||||||||||||||
| Non-cash/non-recurring operating expense: | ||||||||||||||||
| Stock-based compensation expense | 3,561 | 36,023 | 7,304 | 37,928 | ||||||||||||
| Acquisition-related costs | — | 552 | 78 | 18,894 | ||||||||||||
| Change in fair value of derivative asset | 17,749 | (7,413 | ) | (86,865 | ) | (23,806 | ) | |||||||||
| Change in fair value of contingent consideration | — | 259 | 176 | 444 | ||||||||||||
| Realized loss on sale of marketable equity securities | — | — | 1,624 | — | ||||||||||||
| Unrealized loss (gain) on marketable equity securities | (142 | ) | 11,151 | 6,306 | 10,812 | |||||||||||
| Realized gain on sale/exchange of long-term investment | — | — | — | (26,260 | ) | |||||||||||
| Gain on exchange of equipment | (7,667 | ) | — | (16,281 | ) | — | ||||||||||
| Impairment of goodwill | — | — | 335,648 | — | ||||||||||||
| Other (income) expense | — | 85 | 59 | (1,425 | ) | |||||||||||
| Other revenue, (income) expense items: | ||||||||||||||||
| License fees | (25 | ) | (25 | ) | (73 | ) | (73 | ) | ||||||||
| Adjusted EBITDA | $ | 166 | $ | 37,456 | $ | (53,262 | ) | $ | 52,264 | |||||||
| Non-GAAP Adjusted EPS | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Diluted net income (loss) per share | $ | (0.24 | ) | $ | (0.16 | ) | $ | (2.64 | ) | $ | 0.13 | |||||
| Interest (income) expense | — | — | — | — | ||||||||||||
| Income tax expense (benefit) | (0.02 | ) | — | (0.07 | ) | 0.04 | ||||||||||
| Depreciation and amortization | 0.17 | 0.13 | 0.46 | 0.23 | ||||||||||||
| EBITDA | (0.09 | ) | (0.03 | ) | (2.25 | ) | 0.40 | |||||||||
| Adjustments: | ||||||||||||||||
| Non-cash/non-recurring operating expense: | ||||||||||||||||
| Stock-based compensation expense | 0.02 | 0.37 | 0.05 | 0.42 | ||||||||||||
| Acquisition-related costs | — | 0.01 | — | 0.21 | ||||||||||||
| Change in fair value of derivative asset | 0.12 | (0.08 | ) | (0.65 | ) | (0.26 | ) | |||||||||
| Change in fair value of contingent consideration | — | — | — | — | ||||||||||||
| Realized loss on sale of marketable equity securities | — | — | 0.01 | — | ||||||||||||
| Unrealized loss (gain) on marketable equity securities | — | 0.12 | 0.05 | 0.12 | ||||||||||||
| Realized gain on sale/exchange of long-term investment | — | — | — | (0.29 | ) | |||||||||||
| Gain on exchange of equipment | (0.05 | ) | — | (0.12 | ) | — | ||||||||||
| Other (income) expense | — | — | — | (0.02 | ) | |||||||||||
| Impairment of goodwill | — | — | 2.51 | — | ||||||||||||
| Other revenue, (income) expense items: | ||||||||||||||||
| License fees | — | — | — | — | ||||||||||||
| Adjusted EPS | $ | — | $ | 0.39 | $ | (0.40 | ) | $ | 0.58 | |||||||
| Diluted weighted average number of shares outstanding | 153,895,123 | 96,064,036 | 133,894,338 | 89,896,374 | ||||||||||||
In addition to the valuenon-GAAP financial measures of Adjusted EBITDA and Adjusted EPS described above, we believe “Mining revenue in excess of cost of revenues, net of power curtailment credits”, “Data Center Hosting revenue in excess of cost of revenues, net of power curtailment credits”, “Cost of revenues – Mining, net of power curtailment credits” and “Cost of revenues – Data Center Hosting, net of power curtailment credits” are additional performance measurements that represent a key indicator of the warrantsCompany’s core business operations of both Bitcoin mining and Data Center Hosting.
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We believe our ability to sell power back to the beneficial conversion feature upongrid 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 releaseERCOT grid. While participation in various grid demand response programs may impact our Bitcoin production, we view this as an important part of our partnership-driven approach with ERCOT and our commitment to being a good corporate citizen in our communities.
We believe netting the power sales against our costs can be an important financial measure because it allows management, investors, and our board of directors to evaluate and compare our operating results, including our operating efficiencies, from period-to-period by making such adjustments. We have allocated the benefit of the convertible note securities from escrowpower sales to our Data Center Hosting and conversionMining segments based on their proportional power consumption during the periods presented.
Mining revenue in excess of cost of revenues, net of power curtailment credits, Data Center Hosting revenue in excess of cost of revenues, net of power curtailment credits, Cost of revenues – Mining, net of power curtailment credits and Cost of revenues – Data Center Hosting, net of power curtailment credits are provided in addition to Series A Preferred Stock.
Reconciliations of these measurements to the most comparable U.S. GAAP financial metrics for historical periods are presented in the table below:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Mining: | ||||||||||||||||
| Revenue | $ | 22,070 | $ | 53,590 | $ | 126,166 | $ | 108,213 | ||||||||
| Cost of revenues | 14,677 | 13,034 | 51,766 | 29,893 | ||||||||||||
| Power curtailment credits | (6,104 | ) | — | (8,175 | ) | — | ||||||||||
| Cost of revenues, net of power curtailment credits | 8,573 | 13,034 | 43,591 | 29,893 | ||||||||||||
| Mining revenue in excess of cost of revenues, net of power curtailment credits | $ | 13,497 | $ | 40,556 | $ | 82,575 | $ | 78,320 | ||||||||
| Mining revenue in excess of cost of revenues, net of power curtailment credits as a percentage of revenue | 61.2 | % | 75.7 | % | 65.4 | % | 72.4 | % | ||||||||
| Data Center Hosting: | ||||||||||||||||
| Revenue | $ | 8,371 | $ | 11,193 | $ | 27,899 | $ | 14,067 | ||||||||
| Cost of revenues | 14,223 | $ | 12,581 | $ | 44,392 | $ | 16,317 | |||||||||
| Power curtailment credits | (6,996 | ) | (2,507 | ) | (13,153 | ) | (3,650 | |||||||||
| Cost of revenues, net of power curtailment credits | 7,257 | 10,074 | 31,239 | 12,667 | ||||||||||||
| Data Center Hosting revenue in excess of cost of revenues, net of power curtailment credits | $ | 1,114 | $ | 1,119 | $ | (3,340 | ) | $ | 1,400 | |||||||
| Data Center Hosting revenue in excess of cost of revenues, net of power curtailment credits as a percentage of revenue | 13.3 | % | 10.0 | % | (12.0 | )% | 10.0 | % | ||||||||
| Total power curtailment credits | $ | (13,070 | ) | $ | (2,507 | ) | $ | (21,328 | ) | $ | (3,650 | ) | ||||
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2017,2022, we had working capital of $12,555,000,approximately $369.8 million, which included cash and cash equivalents of $13,140,000.$255.0 million. We reported a net loss of $10,968,000, consisting of a net loss from continuing operations of $7,404,000 and a net loss from discontinued operations of $3,564,000,$353.8 million during the nine months ended September 30, 2017. The net2022. Net loss from continuing operations included $5,113,000$285.2 million in non-cash items consisting primarily of amortizationthe change in fair value of debt discount to interestour derivative asset of $4,750,000, stock-based compensation totaling $380,000,$86.9 million, the increase in Bitcoin held of $124.7 million, a realized gain on the sale/exchange of Bitcoin of $25.4 million, the gain on exchange of equipment of $16.3 million, and an income tax benefit of $8.7 million, offset by the impairment of goodwill of $335.6 million, impairment of Bitcoin of $132.1 million, depreciation and amortization totaling $56,000, net of $61.4 million, an unrealized loss on marketable equity securities of $6.3 million, stock-based compensation expense of $7.3 million, the realized loss on sale of marketable equity securities of $1.6 million, and the amortization of license fees totaling $73,000.our right of use asset of $2.9 million.
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Contractual Commitments
At September 30, 2022, we had the following contractual commitments, subject to future adjustments as provided in the contracts (in thousands):
| Agreement Date (1) | Original Purchase Commitment | Open Purchase Commitment | Deposit Balance | Expected Shipping | ||||||||||
| April 5, 2021 | $ | 138,506 | $ | 10,395 | $ | 53,070 | Fourth Quarter 2022 | |||||||
| October 29, 2021 | 56,250 | (422 | ) | 1,609 | Fourth Quarter 2022 | |||||||||
| November 22, 2021 | 32,550 | 2,969 | 21,938 | Fourth Quarter 2022 | ||||||||||
| December 10, 2021 | 97,650 | 11,865 | 65,814 | Fourth Quarter 2022 | ||||||||||
| December 24, 2021 | 202,860 | 20,118 | 134,904 | Fourth Quarter 2022 | ||||||||||
| Total | $ | 527,816 | $ | 44,925 | $ | 277,335 |
(1) Pursuant to the Company’s agreements with Bitmain, among other provisions, the Company is responsible for all shipping charges incurred in connection with the delivery of the miners.
Coinmint Co-location Mining Services Agreement
On April 8, 2020, the Company entered into private placementan agreement with Coinmint, pursuant to which Coinmint agreed to provide up to approximately 9.5 megawatts of electrical power and to perform all maintenance necessary to operate the Company’s miners deployed at the Coinmint Facility. In exchange, Coinmint was reimbursed for direct production expenses and received a performance fee based on the net Bitcoin generated by the Company’s miners deployed at the Coinmint Facility. The amount of electrical power supplied to the Company’s miners at the Coinmint Facility was subsequently increased to accommodate the Company’s expanding miner fleet. During the nine months ended September 30, 2022, the Company elected not to renew its co-location mining services agreement with Coinmint, which was, therefore, terminated automatically by its terms as of July 8, 2022.
Miners
As of September 30, 2022, the Company had outstanding executed purchase agreements for the purchase of miners from Bitmain for a total of approximately 12,097 new model S19j Pro miners and 19,947 new model S19XP miners, scheduled to be shipped through December 2022. Pursuant to these agreements, approximately $44.9 million remains payable to Bitmain, subject to future adjustments as provided in the contracts, in installments in advance of shipment of the miners, which is scheduled to occur monthly through December 2022.
Development of the Corsicana Facility Data Center:
During the nine months ended September 30, 2022, the Company announced that it has initiated a large-scale development to expand its Bitcoin mining and data center hosting capabilities in Navarro County, Texas with the acquisition of a 265-acre site where the anticipated one-gigawatt Corsicana Facility is being constructed. The Company received approval from ERCOT for the entire one-gigawatt capacity. The initial phase of the development of the Corsicana Facility involves the construction on the 265-acre site of 400 megawatts of immersion-cooled Bitcoin mining and data center hosting infrastructure spread across multiple buildings, as well as a high-voltage power substation and transmission facilities to supply power to the facility. Construction of the substation and the data centers is expected to be carried out concurrently, with self-mining and data center hosting operations expected to commence by the fourth quarter of 2023, following the commissioning of the substation, which is expected to be completed in summer 2023.
This first phase of the development of the Corsicana Facility includes land acquisition, site preparation, substation development, and transmission construction, along with construction of ancillary buildings and four buildings utilizing the Company’s immersion-cooling infrastructure and technology. The Company estimates that the total cost of the first phase of the development will be approximately $333 million, which is scheduled to be invested over the remainder of 2022, 2023, and the first quarter of 2024. Through September 30, 2022, the Company has incurred costs of approximately $30 million related to the development of the Corsicana Facility. The acquisition costs include $10 million for land, $15 million of initial developments costs and a $5 million deposit for future power usage. The Company expects to incur costs of approximately $74.0 million over the remaining period of 2022, approximately $223.9 million during 2023, and approximately $9.5 million during the first quarter of 2024.
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Revenue from Operations
Funding our operations on a go-forward basis will rely significantly on our ability to mine Bitcoin at a price above our Mining costs and revenue generated from our Data Center Hosting and Engineering customers. We expect to generate ongoing revenues from Bitcoin rewards from our Mining operations and our ability to liquidate Bitcoin rewards at future values will be evaluated from time-to-time to generate cash for operations.
Generating Bitcoin rewards, for example, which exceed our production and overhead costs will determine our ability to report profit margins related to such mining operations, although accounting for our reported profitability is significantly complex. Furthermore, regardless of our ability to generate cash from the sale of our Bitcoin from our Mining business, we may need to raise additional capital in the form of equity or debt to fund our operations and pursue our business strategy.
The ability to raise funds through the sale of equity, debt financings, or the sale of Bitcoin to maintain our operations is subject to many risks and uncertainties and, even if we were successful, future equity issuances or convertible debt offerings could result in dilution to our existing stockholders and any future debt or debt securities may contain covenants that limit our operations or ability to enter into certain transactions. Our ability to realize revenue through Bitcoin production and successfully convert Bitcoin into cash or fund overhead with Bitcoin is subject to a number of risks, including regulatory, financial and business risks, many of which are beyond our control. Additionally, we have observed significant historical volatility in the market price of Bitcoin and, as such, future prices cannot be predicted. See the discussion of risks affecting our business under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report and in Part I, Item 1A of the 2021 Annual Report.
If we are unable to generate sufficient revenue from our Mining operations, Data Center Hosting operations or Engineering operations when needed or secure additional sources of funding, it may be necessary to adjust our strategy or explore other strategic alternatives.
At-the-Market Equity Offering
The Company entered into the Sales Agreement with the Sales Agents dated March 31, 2022, pursuant to which the Company may, from time to time, sell up to $500 million in shares of the Company’s common stock through the Sales Agents, acting as the Company’s sales agent and/or principal, in a continuous at-the-market offering. The Company will pay the Sales Agents a commission of up to 3.0% of the aggregate gross proceeds the Company receives from all sales of the Company’s common stock under the Sales Agreement. As of September 30, 2022, the Company had received net proceeds of approximately $298.4 million (after deducting $6.5 million in commissions and expenses) on sales of 37.1 million shares of common stock under the Sales Agreement at a weighted average price of $8.23 per share.
Legal Proceedings
The Company is a party in several contractual lawsuits and has also been named a defendant in several legacy class action and other investor related lawsuits as more fully described under the heading “Legal Proceedings” in Part I, Item 3 of the 2021 Annual Report and in Note 16. “Commitments and Contingencies” in the unaudited Notes to Condensed Consolidated Financial Statements included under Part I, Item 1 of this Quarterly Report. While the Company maintains policies of insurance, such policies may not cover all the costs or expenses associated with responding to such matters or any liability or settlement associated with any lawsuits and are subject to significant deductible or retention amounts.
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Whinstone Related Party Transactions
Included in construction in progress as of September 30, 2022, are deposit payments of approximately $0.1 million that relate to a Whinstone initiative for providing certain on-site temporary housing for stakeholders, including partners, analysts, stockholders, etc. The initiative arose as a result of limited accommodations for visitors in the Rockdale, TX, area, which is generally a remote area. The transaction as contemplated would involve Whinstone developing the temporary housing on land owned by Lyle Theriot (indirectly, through a limited liability company). Mr. Theriot is part of the management team at Whinstone and is considered a related party of Whinstone. The Company is evaluating certain related party implications of the initiative on an ongoing basis, under U.S. GAAP and other applicable regulatory reporting requirements including, but not limited to, the Sarbanes-Oxley Act of 2002.
As part of, and contingent upon the closing of the Whinstone Acquisition in May 2021, employment agreements were entered into with the founding management team of Whinstone. The agreements contain customary terms and conditions covering compensation, benefits, duties and services and other terms and conditions. The agreements provide that services shall initially be provided in the Rockdale, Texas area. The agreements provide that the employee be reimbursed for reasonable lodging, housing and utilities, travel, and food in area of project sites, and costs of owning and operating an automobile. Such reimbursed costs have not been material.
During the nine months ended September 30, 2022, a total of $0.7 million was paid in expenses to or on behalf of the Whinstone management team, which included the deposit payments discussed above, and including reimbursement of expenses previously determined to qualify as reimbursable expenses in accordance with the respective employment agreements. During the period from the Whinstone acquisition to September 30, 2021, a total of $0.4 million was paid in expenses to or on behalf of the Whinstone management team, including reimbursement of expenses determined to qualify as reimbursable expenses in accordance with the respective employment agreements and amounts for reimbursement of ongoing business expenses. Additionally, during April 2022 Whinstone acquired a 2022 used SUV at a cost of $0.1 million to be used for transport in the local area as well as being available to the Whinstone management team under their employment agreements.
Operating Activities
Net cash used in operating activities was $0.7 million during the nine months ended September 30, 2017, the Company received2022. Cash was used in operations by net proceeds after offering expenses totaling $1,914,000 from the saleloss of 900,000 shares$353.8 million, less non-cash items of common stock, including the issuance of 900,000 warrants.
Net cash consumed byused in operating activities was $3,164,000, consisting of $2,234,000 from continuing operations and $930,000 from discontinued operations$60.9 million during the nine months ended September 30, 2017.2021. Cash was consumedgenerated from continuing operations by the lossincome of $7,404,000,$11.5 million, less non-cash items of $5,113,000$66.0 million, consisting primarily of a realized gain on the sale of marketable equity securities of $26.3 million, the change in non-cash items consistingfair value of amortizationour derivative asset of debt discount to interest$23.8 million and the increase in Bitcoin held of $4,750,000,$108.1 million, offset by stock-based compensation totaling $380,000,expense of $37.9 million, the impairment of Bitcoin of $17.5 million, depreciation and amortization totaling $56,000,of $20.8 million, an unrealized loss on marketable securities of $10.8 million, deferred income tax expense of $3.7 million, the issuance of common stock warrants of $1.2 million and the change in fair value of contingent consideration of $0.4 million, net of amortizationother immaterial items. The change in assets and liabilities of license fees totaling $73,000. Decreases in$6.4 million consisted primarily of increased customer deposits of $6.1 million, increased accounts receivable of $2.6 million, decreased prepaid expenses and other current assets of $192,000 provided cash, primarily related to reductions in operating activities. There was a net $135,000 decrease in$1.2 million, increased accounts payable and accrued expenses of $4.5 million, change in the nine months ended September 30, 2017, primarily due to reductions in operating activitiesfair value of future power credits of $0.4 million, and the paymentdecreased deferred revenue of 2016 litigation settlement accrual in early 2017.$12.8 million.
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Investing Activities
Net cash consumed by operatingused in investing activities was $3,841,000, consisting of $3,466,000 from continuing operations and $375,000 from discontinued operations during the nine months ended September 30, 2016. Cash2022 was consumed from continuing operations by the loss$329.4 million, primarily consisting of $1,751,000, less non-cash expensesdeposits on equipment of $643,000 for stock-based compensation, depreciation and amortization, and impairment of patent costs, offset by the gain on sale$194.9 million, purchases of property and equipment of $1,933,000$129.7 million and amortizationcash paid for other deposits of license fees totaling $73,000. Increases in prepaid and other current assets$5.5 million, partially offset by proceeds received of $222,000 used cash, primarily related to routine changes in operating activities. There was a $574,000 decrease in accounts payable and accrued expenses in$0.7 million from the nine months ended September 30, 2016, primarily due to the paymentsale of 2015 accrued incentives in early 2016, and a reduction in overall expenses due to the wind-downour shares of the APPY1 activities.Mogo.
Net cash inflows fromused in investing activities provided cash of $4,497,000, consisting of $4,493,000 from continuing operations and a cash inflow of $4,000 from discontinued operations during the nine months ended September 30, 2017. Sales2021 was $221.1 million, primarily consisting of marketable securities investments totaling approximately $7,507,000 provided cash. Cashdeposits on equipment of $3,000,000 was used$103.2 million, our acquisition of Whinstone of $40.9 million, net and purchases of property and equipment of $78.9 million, offset by proceeds of $1.8 million received in connection with the exchange of our shares of Coinsquare investment. A $14,000 useLtd. for shares of cash was attributable to additional costs incurred from patent filings. Mogo.
Financing Activities
Net cash inflows from investingprovided by financing activities provided cash of $4,505,000, consisting of $4,489,000 from continuing operations and a cash inflow of $17,000 from discontinued operationswas $272.8 million during the nine months ended September 30, 2016. Sales2022, which consisted of marketable securities investments totaling approximately $16,523,000 provided cash, net proceeds from the issuance of marketable securities purchased totaling approximately $13,819,000. A $14,000 useour common stock in connection with our 2022 ATM Offering of cash was attributable$298.4 million, partially offset by the shares of common stock withheld to additional costs incurred from patent filings. The salesatisfy employee taxes of $9.9 million in connection with the land, buildingsettlement of vested equity awards granted under our 2019 Equity Plan and assets generated approximately $1,799,000 in cash. As partthe payment of the BDI acquisition $17,000 in cash was acquired.contingent consideration liability of $15.7 million.
Net cash inflows fromprovided by financing activities provided $6,277,000 from continuing operations,was $116.5 million during the nine months ended September 30, 2017 consisting2021, which consisted of net proceeds of $4,750,000 from convertible notes payable, $2,012,000 from the saleissuance of our common stock in connection with our ATM Offerings of $117.5 million and proceeds received from the exercise of common stock and exercisewarrants of warrants and options, net$0.8 million, offset by the repurchase of $193,000 in scheduled payments under debt agreements, and $292,000 consumed from the redemptioncommon stock to pay employee withholding taxes of equity rights payments.$1.8 million.
Critical Accounting Policies
Our critical accounting policies follows:
Recently Issued and $168,000 net patent impairment charges written off during the nine months ended September 30, 2016.
The Company has evaluated all recently issued accounting pronouncements and believes such pronouncements do not have a material effect on the Company'sCompany’s financial statements. See Note 3. “Basis of Presentation, Summary of Significant Accounting Policies and Recent Accounting Pronouncements” in the unaudited Notes to Condensed Consolidated Financial Statements included under Part I, Item 1 of this Quarterly Report.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discussion about our market risk exposures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. For more information regarding the forward-looking statements used in this section and elsewhere in this Quarterly Report, see the Cautionary Note Regarding Forward-Looking Statements at the forepart of this Quarterly Report.
Risk Regarding the Price of Bitcoin:
Our business and development strategy is focused on maintaining and expanding our Mining operations to market risks from instruments that may impactmaximize the Balance Sheets, Statementsamount of Operations, and Statements of Cash Flows. Such exposure is due primarily to changing interest rates.
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As discussed under the heading “Bitcoin” under Note 3. “Basis of Presentation, Summary of Significant Accounting Policies and Recent Accounting Pronouncements” in the Company’s 2021 Annual Report, the Company’s Bitcoin assets are accounted for as indefinite-lived intangible assets, which are recorded at fair value upon receipt, and assessed for impairment when events or circumstances occur indicating that it is more likely than not that the asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of Bitcoin at the time its fair value is being measured. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the investment portfolio wasasset. Subsequent reversal of impairment losses is not permitted.
We cannot accurately predict the future market price of Bitcoin and, as such, we cannot accurately predict whether we will record impairment of the value of our Bitcoin assets. The future value of Bitcoin will affect the revenue from our operations, and any future impairment of the value of the Bitcoin we mine and hold for our account would be reported in cashour financial statements and cash equivalents with very short-term maturities and therefore not subject to any significant interest rate fluctuations. Weresults of operations as charges against net income, which could have no investments denominated in foreign currencies and thereforea material adverse effect on the market price for our investments are not subject to foreign currency exchange risk.securities.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and ProceduresProcedures:
Our management, with the participation of the Company, including theour Chief Executive Officer (principal executive officer) and theour Chief Financial Officer (principal financial officer), has conducted an evaluation ofevaluated the effectiveness of the Company'sour disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act) as of September 30, 2022 to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act of 1934 Rule 13a-15(e)) as ofis recorded, processed, summarized and reported within the last day oftime periods specified in SEC rules and forms, and that information required to be disclosed in the period ofreports we file or submit under the accompanying financial statements. Based on that evaluation, theExchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on this evaluation, our management concluded that our disclosure controls and procedures arewere not effective at the reasonable assurance level as of September 30, 2017.2022, due to the following material weaknesses:
| 1) | The Company did not design and/or implement user access controls to ensure appropriate segregation of duties that would adequately restrict user and privileged access to the financially relevant systems and data to the appropriate Company personnel. | |
| 2) | The Company did not design and implement program change management controls for certain financially relevant systems to ensure that IT program and data changes affecting the Company’s (i) financial IT applications, (ii) digital currency cold storage wallets and mining equipment, and (iii) underlying accounting records, are identified, tested, authorized and implemented appropriately to validate that data produced by its relevant IT system(s) were complete and accurate. Automated process-level controls and manual controls that are dependent upon the information derived from such financially relevant systems were also determined to be ineffective as a result of such deficiency. | |
| 3) | The Company did not properly design or implement controls to ensure that data received from third parties is complete and accurate. Such data is relied on by the Company in determining amounts pertaining to revenue - mining and cryptocurrency assets held is complete and accurate. Automated process-level controls and manual controls that are dependent upon the information derived from such financially relevant systems were also determined to be ineffective as a result of such deficiency. | |
| 4) | The Company did not properly design and implement controls to ensure that certain inputs and assumptions utilized in the valuation of intangible assets identified in its accounting for business combinations were reasonable in the circumstances. Such deficiency also resulted in material adjustments required to the Company’s provision for income taxes. | |
| 5) | During testing of procedures during 2021, the Company’s subsidiary, Whinstone, did identify that there were material weaknesses over internal controls at Whinstone. The weaknesses noted that Whinstone did not properly document the design of its internal controls; did not design and implement procedures to ensure proper segregation of duties and all transactions are entered and disclosed timely and accurately in accordance with GAAP, which includes transactions with related parties. |
These material weaknesses create a reasonable possibility that a material misstatement to our consolidated financial statements or disclosures would not be prevented or detected on a timely basis.
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Remediation
Our Board of Directors and management take internal control over financial reporting and the integrity of our financial statements seriously. Management continues to work to improve its controls related to our material weaknesses, specifically relating to user access and change management surrounding the Company’s IT systems and applications. Management will continue to implement measures to remediate material weaknesses, such that these controls are designed, implemented, and operating effectively. The remediation actions include: (i) enhancing design and documentation related to both user access and change management processes and control activities (ii) developing and communicating additional policies and procedures to govern the area of IT change management, and (iii) developing robust processes to validate all data that is received from third-parties and relied upon to generate financial statements. To achieve the timely implementation of the above, management has commenced the following actions and will continue to assess additional opportunities for remediation on an ongoing basis:
| ● | Engaging a third-party specialist to assist management with improving the Company’s overall control environment, focusing on change management, access, and financial reporting controls . |
| ● | Implementing new applications and systems that are aligned with management’s focus on creating strong internal controls, as well as complete and accurate financial statements. |
| ● | Implementing more robust policies and procedures, relating to third-party data as well as the inputs and assumptions utilized in estimates, including in business combination valuations and assessments, to ensure the reliability of controls and financial reporting . |
| ● | Continuing to increase headcount across the Company, with a particular focus on hiring individuals with strong SOX and internal control backgrounds. |
However, the material weaknesses in our internal control over financial reporting will not be considered remediated until other ITGCs and process-level controls operate for a sufficient period of time and can be tested and concluded by management to be designed and operating effectively. We cannot provide any assurance that these remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts. In addition, we continue to evaluate and work to improve our internal control over financial reporting related to the identified material weaknesses, management may determine to take additional measures to address control deficiencies or determine to modify the remediation plan described above.
Changes in Internal Control Overover Financial ReportingReporting:
We are taking the remedial actions described above and expect to implement them prior to December 31, 2022.
During the fiscal year ended December 31, 2021, we completed acquisitions of two significant subsidiaries, Whinstone and ESS Metron, and began the process of integrating these acquired businesses into our own, including incorporating our system of internal controls and procedures with those of our acquired businesses. As part of our integration of these acquired businesses, we are in the Company'sprocess of incorporating our controls and procedures with respect to Whinstone’s and ESS Metron’s operations, which we expect to complete as of December 31, 2022. Other than the system and related process changes associated with these two acquisitions, there have been no changes in our internal control over financial reporting that occurred during the fiscal quarter to which this report relatesnine months ended September 30, 2022, that hashave materially affected, or isare reasonably likely to materially affect, the Company'sour internal control over financial reporting.
During 2022 the internal controls of the acquired subsidiaries are being updated and remediated and will be subject to testing and evaluation by management and our auditors.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Disclosure under this Item is incorporated by reference to any legal proceedings, the adverse outcome of which would,disclosure provided in our management's opinion, have a material adverse effect on our business, financial conditionthis Quarterly Report under Part I, Item 1., Financial Statements in Note 16. “Commitments and results of operations.Contingencies” to these unaudited Notes to Condensed Consolidated Financial Statements.
Item 1A. Risk Factors
Certain factors may have a materially adversely affectadverse effect on our business, financial condition, and results of operations, including the risk, factors, and uncertainties described under this Part II, Item 1A, and elsewhere in this Quarterly Report, as well as the various risks, factors and uncertainties discussed under the heading “Risk Factors” under Part I, Item 1A of the 2021 Annual Report, as well as elsewhere in the 2021 Annual Report and in the other filings we make with the SEC, including our quarterly reports on Form 10-Q for the three months ended March 31, 2022 and June 30, 2022, as filed with the SEC on May 10, 2022 and August 15, 2022, respectively. This is not an exhaustive list, and there are other factors that may be applicable to our business that are not currently known to us or that we currently do not believe are material. Any of these risks could have an adverse effect on our business, financial condition, operating results. In that case,results, or prospects, which could cause the trading price of our common stock to decline, and you could decline.
Item 2. Unregistered Sales of cryptocurrencies in a manner that adversely affects the Company’s business, prospects or operations.Equity Securities and Use of Proceeds
N/A - none.
Item 3. Defaults Upon Senior Securities
N/A - none.
Item 4. Mine Safety Disclosures
N/A - none.
Item 5. Other Information
N/A - none.
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Item 6. Exhibits
| 3.1 | Articles of Incorporation filed September 20, 2017 (Incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed September 25, 2017). | ||
| 3.2 | Bylaws effective September 20, 2017 (Incorporated by reference to Exhibit 3.2 of | ||
| 3.3 | Amendment to Bylaws effective March 9, 2018 (Incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed March 12, 2018). | ||
| 3.4 | Articles of Merger between Bioptix, Inc. and Riot Blockchain, Inc. (Incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed October 4, 2017). | ||
| 4.1+* | Third Amendment to the Riot Blockchain, Inc. | ||
| 10.1+* | |||
| 10.2+* | |||
| 10.3+* | |||
| 31. | Rule 13a-14(a)/15d-14(a) Certifications. | ||
| 31.1* | |||
| 31.2* | |||
| 32. | Section 1350 Certification | ||
| 32.1* | |||
| 32.2* | |||
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).* |
| * | Filed herewith. | |
+ | Indicates a management contract or compensatory plan or arrangement. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.authorized on November 7, 2022.
Riot Blockchain, Inc. (Registrant) | |
| Dated: November | /s/ Jason Les |
| Jason Les | |
Chief Executive Officer (Principal Executive Officer) | |
| /s/ | |
Chief Financial Officer (Principal Financial Officer) |
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