Riot Platforms, Inc. - Quarter Report: 2022 June (Form 10-Q)

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q 

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2022 

 

OR

 

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission file number: 001-33675 

 

		Riot Blockchain, Inc.
		(Exact name of registrant as specified in its charter)

 

Nevada			84-1553387
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
	3855 Ambrosia Street, Suite 301, Castle Rock, CO 80109
	(Address of principal executive offices) (Zip Code)
	(303) 794-2000
	(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: 

Title of each class:		Trading Symbol(s):		Name of each exchange on which registered:
Common Stock, no par value per share		RIOT		Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

	Large Accelerated Filer	☒		Accelerated Filer	☐
	Non-Accelerated Filer	☐		Smaller Reporting Company	☐
	Emerging Growth Company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒ 

The number of shares of no-par value common stock outstanding as of August 11, 2022 was 154,536,152.

 

RIOT BLOCKCHAIN, INC. 

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

 

 

 

RIOT BLOCKCHAIN, INC.

As used in this Quarterly Report on Form 10-Q (this “Quarterly Report”), the terms “we,” “us,” “our,” the “Company,” the “Registrant,” “Riot Blockchain, Inc.,” and “Riot” mean Riot Blockchain, Inc. and its consolidated subsidiaries, unless otherwise indicated.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report and the documents incorporated by reference herein contain forward-looking statements that involve risks and uncertainties, including those discussed under the heading “Risk Factors” in this Quarterly Report and under similar headings in the other filings we make with the U.S. Securities and Exchange Commission (the “SEC”), and are based on management’s assumptions and beliefs about the future that may not materialize or prove to be correct, which could cause our results to differ materially from those expressed in or implied by such forward-looking statements. All statements contained in this Quarterly Report and the documents incorporated by reference herein other than statements of historical fact, such as those set forth under Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report, are statements that could be deemed forward-looking statements. Such forward-looking statements may include, without limitation, statements concerning: our plans, strategies and objectives for future operations; new equipment, systems, technologies, services or developments, such as our investment in our development and implementation of industrial-scale immersion-cooled Bitcoin mining hardware and our planned one gigawatt data center development in Corsicana, Texas; future economic conditions, performance or outlook; future political conditions; the outcome of contingencies; potential acquisitions or divestitures; the number and value of Bitcoin rewards we earn from our mining operations; expected cash flows or capital expenditures; our beliefs or expectations; activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future; and our assumptions and beliefs underlying or based upon any of the foregoing. Forward-looking statements are made in reliance on the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) and the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by their use of forward-looking terminology, such as “believes,” “expects,” “may,” “should,” “would,” “will,” “intends,” “plans,” “estimates,” “anticipates,” “projects,” or the negative of these words, and similar words or expressions. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking, and you should consider any statement contained in this Quarterly Report or the documents incorporated by reference herein other than statements of historical fact to be a “forward-looking statement” within the meaning of this cautionary note. You should not place undue reliance on these forward-looking statements, which reflect our management’s opinions only as of the date such statements are made and are not guarantees of future performance or actual results. The following are some of the risks, factors and uncertainties which we believe could cause our actual results to differ materially from our historical results or our current expectations or projections expressed in or underlying such forward-looking statements:

• our strategic decision to concentrate on Bitcoin mining ties the success of our business to the success of Bitcoin;  

• our Bitcoin mining operations are subject to unique industry risks outside of our control that could have material adverse effects on our business, including, among others: our need for significant amounts of low-cost and reliable electricity; changes to laws and regulations pertaining to mining, transacting in, or holding Bitcoin; the historical volatility in the demand for, and price of, Bitcoin; changes in the public perception of Bitcoin; our need for consistent, high-speed, and highly secure Internet connectivity; intense competition for new miners and the necessary infrastructure, personnel, material and components to support industrial-scale Bitcoin mining operations; cybersecurity risks; increased global Bitcoin network hash rate and difficulty; and competition for a fixed supply of Bitcoin rewards;  

• our Bitcoin mining operations are capital-intensive and can only be successful if our mining costs are lower than the value of the Bitcoin we mine, which has been subject to significant price volatility; therefore, our ability to make accurate projections about our business and future contingencies is significantly impaired as a result of this price volatility and other risks that lie largely outside of our control, such as our suppliers’ inability to perform or timely deliver the new miners, parts, or services we purchase from them, as well as other risks we may not anticipate;

 • we have made significant investments in our development of industrial-scale immersion-cooled Bitcoin mining infrastructure, which is subject to unique risks and uncertainties, and if we are unable to effectively implement this innovative technology because of these risks or other factors, we may not realize the benefits we anticipate from our substantial investment in immersion-cooled Bitcoin mining on the schedule we anticipate, if at all;

• our Bitcoin mining operations are concentrated in discrete locations, and a natural disaster, unforeseen environmental issues, or other significant disruption affecting our facilities could severely impact our ability to operate and could have a material adverse effect on our business, results of operations, financial condition, and the market price of our securities;

• we cannot predict the consequences of future geo-political events, such as international conflict and related sanctions, COVID-19 and the ongoing global supply chain crisis that has resulted, to our business, our suppliers, and the markets in which we operate, which significantly impairs our ability to make accurate projections of future revenues, costs, and risks, and we may be unable to properly insure against these risks as a result;

 

• the growing public awareness of climate change and the negative media attention given to the energy consumption of proof-of-work cryptography may lead to the implementation of new taxes, laws and regulations affecting our access to energy, a decline in the demand for new Bitcoin, or other factors that could have a material adverse effect on our business, results of operations, and the market price of our securities, regardless of our efforts to control the climate impact of our operations;

• we may be required to record a significant charge to earnings if the value of our goodwill, amortizable intangible assets, or Bitcoin holdings become impaired due to a change in circumstances indicating that these assets’ carrying value may not be recoverable, such as a sustained decline in the value of a Bitcoin from the value recorded when we mine it, a decline in our stock price and market capitalization, reduced future cash flow estimates, and other changes to our industry and the macroeconomic environment in which we operate; 

• we have made, and expect to continue to make, strategic acquisitions and investments, including our recent decision to develop a second large-scale Bitcoin mining and data center facility in Corsicana, Texas, which entail significant risks and uncertainties that could adversely affect our business, results of operations, and financial condition, such as unforeseen difficulties in integrating the operations of an acquired business into our own, and we may fail to realize the anticipated benefits of these acquisitions on the schedule we expect, if at all;

• we expect to need to raise additional capital, in the form of equity or debt, to fund our business objectives, goals, and strategies; however, volatility in the trading price of shares of our common stock and the price of Bitcoin may jeopardize our ability to raise the necessary additional capital;  

• we could be negatively impacted by a security breach, through cyber-attack, cyber-intrusion, insider threats or otherwise, or other significant disruption of our information technology networks and related systems;

• global macroeconomic conditions have given rise to significantly increased competition for labor, and we may be unable to hire the qualified and talented personnel we need for our operations and to carry out our business strategy, or to retain our workforce without substantially increasing our compensation and other benefits, which could increase our operating costs significantly;

• our reputation and ability to do business may be impacted by the improper conduct of our employees, agents or business partners; and

• the outcome of litigation or arbitration in which we are involved from time to time is unpredictable, and an adverse decision in any such matter could have a material adverse effect on our financial condition, results of operations, cash flows and equity.   

Additional details and discussions concerning some of the various risks, factors and uncertainties that could cause future results to differ materially from those expressed or implied in our forward-looking statements are set forth under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021, as amended (the “2021 Annual Report”), as well as those which may be disclosed in current reports on Form 8-K and other subsequent filings we make with the SEC. The foregoing list of factors and the factors set forth under the heading “Risk Factors” included in our 2021 Annual Report, this Quarterly Report, and the other filings we make with the SEC are not exhaustive. Additional risks and uncertainties not known to us or that we currently believe not to be material may adversely impact our business, financial condition, results of operations and cash flows. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Should any risks or uncertainties develop into actual events, these developments could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Accordingly, you should read this Quarterly Report completely and with the understanding that our actual future results may be materially different from our historical results and from those expressed in or implied by the forward-looking statements contained in this Quarterly Report and the documents incorporated by reference herein. The forward-looking statements contained in this Quarterly Report and the documents incorporated by reference herein speak only as of the date they are made and, unless otherwise required by applicable securities laws, we disclaim any intention or obligation to update or revise any such forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.

  

PART I - FINANCIAL INFORMATION 

Item 1. Financial Statements

Riot Blockchain, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

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

 

		June 30, 2022				December 31, 2021
ASSETS			(Unaudited)
Current assets
Cash and cash equivalents		$	270,483			$	312,315
Accounts receivable			16,091				15,398
Costs and estimated earnings in excess of billings			13,779				9,862
Prepaid expenses and other current assets			12,999				7,135
Cryptocurrencies			126,574				159,544
Future power credits, current portion			54,477				58,481
Investments in marketable equity securities, at fair value			2,028				10,804
Total current assets			496,431				573,539
Property and equipment, net			411,244				262,980
Deposits			363,010				266,170
Intangible assets, net			13,371				14,162
Goodwill			—				349,063
Derivative asset			130,693				26,079
Right of use assets			21,166				13,189
Future power credits, less current portion			—				25,447
Other long-term assets			310				310
Total assets		$	1,436,225			$	1,530,939
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable		$	18,761			$	20,037
Billings in excess of costs and estimated earnings			6,389				5,264
Accrued compensation			3,247				5,927
Accrued expenses			13,524				16,144
Deferred revenue, current portion			2,651				2,843
Contingent consideration liability - future power credits, current portion			54,477				58,481
Operating lease liability, current portion			1,518				1,182
Total current liabilities			100,567				109,878
Deferred revenue, less current portion			18,851				19,796
Operating lease liability, less current portion			19,968				12,257
Contingent consideration liability - future power credits, less current portion			—				25,447
Other long-term liabilities			8,274				6,241
Total liabilities			147,660				173,619
Commitments and contingencies - Note 16
Stockholders' equity
Preferred stock, no par value, 15,000,000 shares authorized:
2% Series A Convertible stock, 2,000,000 shares authorized; no shares issued and outstanding as of June 30, 2022 and December 31, 2021			—				—
0% Series B Convertible stock, 1,750,001 shares authorized; no shares issued and outstanding as of June 30, 2022 and 2,199 shares issued and outstanding as of December 31, 2021, liquidation preference over common stock, equal to carrying value			—				11
Common stock, no par value; 170,000,000 shares authorized; 147,986,173 and 116,748,472 shares issued and outstanding as of June 30, 2022 and December 31, 2021			1,857,108				1,595,147
Accumulated deficit			(568,543	)			(237,838	)
Total stockholders' equity			1,288,565				1,357,320
Total liabilities and stockholders' equity		$	1,436,225			$	1,530,939

 

Included with construction in progress as of June 30, 2022, are deposit payments of approximately $0.1 million that relate to a Whinstone initiative for providing certain on-site temporary housing for stakeholders, including partners, analysts, shareholders, etc. The initiative arose as a result of limited accommodations for visitors in the Rockdale, TX, area, which is generally a remote area. The transaction as contemplated would involve Whinstone developing the temporary housing on land owned by Lyle Theriot (indirectly, through a limited liability company), who is part of the management team at Whinstone and who is considered a related party of Whinstone and who is considered a related party of Whinstone.. The Company is evaluating certain related party implications of the initiative, under U.S. GAAP and other applicable regulatory reporting requirements such as the Sarbanes-Oxley Act of 2002.

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

 (Unaudited) 

Note 10. Long-Term Assets

Deposits:

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

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

Deposits on Equipment:

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

Right of Use Assets:

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

 

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited) 

Note 11. Accrued Expenses

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

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

Note 12. Leases

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

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

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

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

During the six months ended June 30, 2022, the Company executed a third lease amendment to the ground lease for the Whinstone facility, to add a second 100-acre tract of real property contiguous to the existing 100-acre tract on which the existing Whinstone Facility sits for an additional $0.9 million in annual payments. The initial term of the lease is scheduled to expire on January 31, 2032, followed by three ten-year renewal periods, unless terminated earlier. Concurrent with this third amendment, the Company executed a first amendment to the water reservation agreement to obtain additional non-potable cooling water from a nearby lake to be used by the Company for commercial purposes, such as evaporative cooling in our data center facility, for an additional $1.0 million in annual payments. The term of the original water reservation agreement was reset for a period of approximately twelve years from the original commencement date in April 2021, and is now scheduled to expire on January 31, 2032, followed by three ten-year renewal periods, unless terminated earlier.

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited) 

 

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

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

 

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

Other Information

 

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

 

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

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

 

We recognize ground lease expense in cost of revenues – Data Center Hosting, and office and other lease expense in selling, general and administrative expenses, respectively, in the accompanying unaudited condensed consolidated statements of operations.

 

Note 13. Stockholders’ Equity

 

Preferred stock: 

 

During the six months ended June 30, 2022, the remaining 2,199 shares of the Company’s 0% Series B Convertible Preferred Stock were converted to 2,199 shares of its common stock.

 

At-the-Market Equity Offering:

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

 

 

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited) 

 

Common Stock: 

 

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

 

During the six months ended June 30, 2022, 1,162,080 shares of common stock were issued to the Company’s officers and employees in settlement of an equal number of fully vested restricted stock units awarded to such individuals by the Company pursuant to grants made under the Riot Blockchain, Inc. 2019 Equity Incentive Plan, as amended from time to time (the “2019 Equity Plan”). The Company withheld 486,395 of these shares at a fair value of approximately $8.8 million, to cover taxes related to the settlement of these vested restricted stock units, as permitted by the 2019 Equity Plan. See Note 14. “Restricted Common Stock, Stock Options, Restricted Stock Units (“RSUs”) and Warrants” to these unaudited Notes to Condensed Consolidated Financial Statements.

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

Stock-Based Compensation:

 

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

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

 

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

Restricted Common Stock Awards:

Performance-based RSUs

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

			Number of Shares				Weighted Average Grant-Date  Fair Value
Unvested at January 1, 2022				3,404,585			$	36.68
Granted				715,300			$	16.08
Vested				(568,860	)		$	36.21
Forfeited				(80,033	)		$	33.75
Unvested at June 30, 2022				3,470,992			$	32.58

 

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited) 

 

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

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

Service-based RSUs

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

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

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

Other Common Stock Purchase Warrants:

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

 

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

 

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited) 

Note 15. Fair Value Measurements

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

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

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

 

 

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

Level 3 Assets: 

Power Supply Agreement

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

The terms of the Power Supply Agreement require margin-based collateral for both TXU and the Company, calculated as exposure resulting from fluctuations in the market cost rate of electricity versus the fixed price stated in the contract. The margin-based collateral requirement of the Company was zero as of June 30, 2022 and December 31, 2021.

 

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited) 

 

Level 3 Liabilities: 

Business Combination Contingent Consideration

 

The Company recorded a Level 3 financial liability during the year ended December 31, 2021, relating to the contingent consideration arrangement arising from the acquisition of Whinstone. Contingent consideration represents an obligation of the Company to transfer cash to the Whinstone Seller when Whinstone realizes or receives a benefit from utilization of certain defined power credits. The Company estimated the fair value of the contingent consideration using a discounted cash flow analysis, which includes estimates of both the timing and amounts of potential future power credits. These estimates were determined using the Company’s historical consumption quantities and patterns combined with management’s expectations of its future consumption requirements, which require significant judgment and depend on various factors outside the Company’s control, such as construction delays. The discount rate of approximately 2.5% includes observable market inputs, such as TXU’s parent company’s Standard & Poor’s credit rating of BB, but also includes unobservable inputs such as interest rate spreads, which were estimated based on qualitative judgment related to company-specific risk factors. Specifically, due to the power credits being subordinated obligations for TXU’s parent, we used one credit rating lower than BB in our yield curve to estimate a reasonable interest rate spread to determine the cost of debt input. The significant assumptions used to estimate fair value of the derivative contract include a discount rate of 21%, which reflected the nature of the contract as it relates to the risk and uncertainty of the estimated future mark-to-market adjustments, forward price curves of the power supply, broker/dealer quotes and other similar data obtained from quoted market prices or independent pricing vendors. Although these estimates are based on management’s best knowledge of current events, the estimates could change significantly from period to period. Actual results that differ from the assumptions used and any changes to the significant assumptions and unobservable inputs used could have a material impact on future results of operations.

Changes in Level 3 assets and liabilities measured at fair value on a recurring basis:

Unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category. Unrealized gains and losses associated with the asset within the Level 3 category includes changes in fair value that were attributable to unobservable (e.g., changes in unobservable long-dated volatilities) inputs.

The following table presents the changes in the estimated fair value of the derivative asset measured using significant unobservable inputs (Level 3) for the six months ended June 30, 2022 and 2021:

 

		2022				2021
Balance as of January 1		$	26,079			$	—
Acquisition of Whinstone			—				13,967
Change in fair value			104,614				16,393
Balance as of June 30		$	130,693			$	30,360

For the three and six months ended June 30, 2022, there was a change of approximately $60.9 million and $104.6 million, respectively, in Level 3 assets measured at fair value. Additionally, during the three and six months ended June 30, 2022, power sales back into the Electric Reliability Council of Texas (“ERCOT”) marketplace through Whinstone’s participation in ERCOT’s energy demand response programs totaled $5.7 million and $8.3 million, respectively, which are recorded in power curtailment credits in the accompanying unaudited condensed consolidated statements of operations. During the three and six months ended June 30, 2021, power curtailment credits totaled $1.1 million in each period.

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited) 

 

 

The following table presents the changes in the estimated fair value of our liability for contingent consideration measured using significant unobservable inputs (Level 3) for the six months ended June 30, 2022 and 2021:

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

 

For the three and six months ended June 30, 2022 and 2021, the change in Level 3 liabilities measured at fair value was $0.2 million for each period. The Company’s estimated liability for contingent consideration represents potential payments of additional consideration for the Whinstone Acquisition, payable if Whinstone realizes or receives a benefit from utilization of certain defined power credits. Changes in the fair value of contingent consideration are recorded in the unaudited condensed consolidated statements of operations within change in fair value of contingent consideration.

There were no transfers of financial instruments between Level 1, Level 2 and Level 3 during the periods presented.

Note 16. Commitments and Contingencies

Commitments:

Operating Leases:

The Company leases its primary office locations, manufacturing facilities and data center hosting facilities, as well as a ground lease, under noncancelable lease agreements that expire on varying dates through 2032. See Note 12. “Leases” to these unaudited Notes to Condensed Consolidated Financial Statements.

Water Reservation Agreement:

Whinstone executed a water reservation agreement in April 2021 with the lessor of the ground lease to obtain a certain quantity of non-potable cooling water from a nearby lake to be used by the Company for evaporative cooling at our Whinstone Facility. During the six months ended June 30, 2022, and concurrent with the third amendment to the ground lease described in Note 12. “Leases” to these unaudited Notes to Condensed Consolidated Financial Statements, the Company executed a first amendment to the water reservation agreement to obtain additional non-potable cooling water for the expanded lease area, for an additional $1.0 million in annual payments. The term of the water reservation agreement was reset for a period now expiring on January 31, 2032, followed by three ten-year renewal periods, unless terminated earlier, and requires total annual payments of approximately $2.0 million.

 

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited) 

 

The Company concluded that the agreement was not a lease or a derivative instrument. Because the Company obtained an additional right of use for the reserved non-potable cooling water amount, and the charges were increased by a standalone price commensurate with the additional non-potable cooling water use rights and at market rates, the water reservation agreement was determined to be a lease modification accounted for as a separate contract. As such, the fees of the water reservation agreement were excluded from the lease payments of the ground lease and the water reservation agreement was accounted for as a separate executory contract.

Contingencies:

Legal Proceedings:

The Company, and its subsidiaries, are subject at times to various claims, lawsuits and governmental proceedings relating to the Company’s business and transactions arising in the ordinary course of business. The Company cannot predict the final outcome of any such proceedings; however, it assesses the probability of an unfavorable outcome of any material litigation, claims or proceedings to determine whether a liability had been incurred. Where appropriate, the Company vigorously defends such claims, lawsuits and proceedings. Some of these claims, lawsuits and proceedings seek damages, including, consequential, exemplary or punitive damages, in amounts that could, if awarded, be significant. Certain of the claims, lawsuits and proceedings arising in ordinary course of business are covered by the Company’s insurance program. The Company maintains property and various types of liability insurance to protect the Company from such claims. In terms of any matters where no insurance coverage is available to the Company, or where coverage is available and the Company maintains a retention or deductible associated with such insurance, the Company may establish an accrual for such loss, retention or deductible based on current available information. In accordance with accounting guidance, if it is probable that an asset has been impaired or a liability has been incurred as of the date of the financial statements, and the amount of loss is reasonably estimable, then an accrual for the cost to resolve or settle these claims is recorded by the Company in the accompanying consolidated balance sheets. If it is reasonably possible that an asset may be impaired as of the date of the financial statement, then the Company discloses the range of possible loss. Expenses related to the defense of such claims are recorded by the Company as incurred and included in the accompanying consolidated statements of operations. Management, with the assistance of outside counsel, may from time to time adjust such accruals according to new developments in the matter, court rulings, or changes in the strategy affecting the Company’s defense of such matters. Based on current information, the Company does not believe there is a reasonable possibility that, other than with regard to the Class Action described below, a material loss, if any, will result from claims, lawsuits or proceedings to which the Company is subject to either individually, or in the aggregate.

Whinstone Customer Dispute

On June 13, 2022, GMO Gamecenter USA, Inc., a California corporation, and GMO Internet, Inc., a corporation organized and existing under the laws of Tokyo, Japan (collectively “GMO”), filed a complaint against Whinstone US, Inc. in the Supreme Court of the State of New York County of New York: Commercial Division, Index No.: 656762/2022, subsequently removed to the United States District Court, S.D.N.Y., Case No. 1:22-cv-05974-JPC (the “Complaint”). After extensive discussions and upon Whinstone demanding that GMO reasonably negotiate a new hosting agreement in good faith pursuant to the terms of its existing agreement, GMO filed the Complaint. GMO alleges Whinstone breached a Colocation Services Agreement by failing to indemnify GMO for certain contractual loss of profit, and causing certain other damages to GMO in the nature of loss of revenue, lost profits and loss of savings. GMO is seeking compensatory damages in excess of $50 million, and pre-judgment and post-judgment interest. Whinstone is preparing to respond to the Complaint, which is due August 22, 2022. Whinstone denies the substantive allegations of the Complaint, intends to vigorously defend Whinstone against GMO’s claims, and intends to assert a Counterclaim against GMO.

Class Actions and Related Claims

On February 17, 2018, Creighton Takata filed an action asserting putative class action claims on behalf of the Company’s stockholders in the United District Court for the District of New Jersey, Takata v. Riot Blockchain Inc., et al., Case No. 3: 18-cv-02293. On April 18, 2018, Joseph J. Klapper, Jr., filed a complaint against Riot Blockchain, Inc., and certain of its officers and directors in the United District Court for the District of New Jersey, Klapper v. Riot Blockchain Inc., et al., Case No. 3: 18-cv-8031. The complaints contained substantially similar allegations, asserting violations of federal securities laws under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 on behalf of a putative class of stockholders that purchased stock from November 13, 2017 through February 15, 2018. The complaints alleged that the Company and certain of its officers and directors made, caused to be made, or failed to correct false and/or misleading statements in press releases and public filings regarding its business plan in connection with its cryptocurrency business. The complaints request damages in unspecified amounts, costs and fees of bringing the action, and other unspecified relief.

On November 6, 2018, the court in the Takata action issued an order consolidating Takata with Klapper into a single putative class action. On April 30, 2020, the court granted Defendants’ motions to dismiss the consolidated complaint, which resulted in the dismissal of all claims without prejudice.

On December 24, 2020, Lead Plaintiff filed another amended complaint. On April 8, 2022, the court again granted Defendants’ motions to dismiss the operative complaint without prejudice. On May 27, 2022, Lead Plaintiff filed the third amended consolidated complaint. Defendants submitted motions to dismiss on July 18, 2022.  Briefing on the motions to dismiss will be completed in October 2022. Because this litigation is still at this early stage, we cannot reasonably estimate the likelihood of an unfavorable outcome or the magnitude of such an outcome, if any.

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited) 

 

Shareholder Derivative

In 2018, five shareholder derivative actions were filed on behalf of the Company. The complaints in each of these actions contain allegations similar to the allegations set forth in the shareholder class action complaint pending in the United States District Court for the District of New Jersey and seek recovery against the Company and certain of the Company’s officers and directors and an investor for alleged claims including breaches of fiduciary duty, aiding and abetting breaches of fiduciary duty, unjust enrichment, waste of corporate assets, abuse of control, and mismanagement. Each of the complaints also seek unspecified monetary damages and corporate governance changes. All of the cases have been stayed pending resolution of the motion to dismiss in the securities class action pending in the United States District Court for the District of New Jersey, except for one matter (Jackson v. Riot Blockchain, Inc., et al., Case No. 604520/18, Supreme Court of the State of New York, County of Nassau) in which the court has adjourned the preliminary conference until February 7, 2023 in lieu of staying the action. Defendants do not anticipate any other activity on this case until the next preliminary conference.

Defendants intend to vigorously contest plaintiffs’ allegations in the shareholder derivative actions and plaintiffs’ right to bring the action in the name of Riot Blockchain. As this litigation is still at an early stage, we cannot reasonably estimate the likelihood of an unfavorable outcome or the magnitude of such an outcome, if any.

Note 17. Segment Information

The Company applies ASC 280, Segment Reporting, in determining its reportable segments. The Company has three reportable segments: Mining, Data Center Hosting, and Engineering. The guidance requires that segment disclosures present the measure(s) used by the CODM to decide how to allocate resources and for purposes of assessing such segments’ performance. The Company’s CODM is comprised of several members of its executive management team who use revenue and cost of revenues of our three reporting segments to assess the performance of the business of our reportable operating segments.

No operating segments have been aggregated to form the reportable segments. The Company does not allocate all assets to the reporting segments as these are managed on an entity-wide basis. Therefore, the Company does not separately disclose the total assets of its reportable operating segments.

The Mining segment generates revenue from the Bitcoin the Company earns through its mining activities. The Data Center Hosting segment generates revenue from long-term customer contracts for the provision/consumption of electricity, construction of infrastructure, operation of data centers and maintenance/management of computing capacity from the Company’s data center facility in Rockdale, Texas. The Engineering segment generates revenue through customer contracts for custom engineered electrical products.

The Data Center Hosting segment purchases custom engineered electrical products from the Engineering segment in the ordinary course of business. Effective January 1, 2022, the Mining segment entered into a colocation services agreement with the Data Center Hosting segment whereby the Mining segment is charged a base colocation fee per miner deployed at Whinstone plus a performance fee calculated as a percentage of gross mining profit. The revenue and cost of revenues from intersegment transactions have been eliminated in the consolidated statements of operations in accordance with U.S. GAAP. For purposes of segment reporting, the revenues and cost of revenues for each segment are presented in the table below on a stand-alone basis, with the intersegment eliminations presented separately, such that total revenue and total cost of revenues total to the consolidated statements of operations. All other revenues are from external customers. No single third-party customer or related group of third-party customers contributed 10% or more of the Company’s total consolidated revenue during the three and six months ended June 30, 2022 and 2021. However, three customers accounted for nearly all of the Company’s third-party Data Center Hosting revenue.

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited) 

 

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

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

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

 

 

Riot Blockchain, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited) 

Note 18. Subsequent Events

Sale of Common Stock:

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

Sale of Bitcoin:

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

Employee Equity Grants:

Subsequent to June 30, 2022, the Company granted 729,349 restricted stock units under the 2019 Equity Plan, including: (a) 38,350 service-based RSUs with a fair value of approximately $0.2 million, which are eligible to vest in four quarterly tranches following the grant date, subject to the recipient’s continued employment with the Company through the vesting date; and (b)  690,999 performance-based RSUs with a fair value of approximately $3.2 million, which are eligible to vest based on the Company’s achievement of certain performance objectives, as specified under the performance-based restricted stock unit plan adopted on August 12, 2021 under the 2019 Equity Plan.

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

Termination of Co-location Mining Services Agreement

The Company elected not to renew its co-location mining services agreement with Coinmint, which was, therefore, terminated automatically by its terms as of July 8, 2022. See Note 8. “Property and Equipment” to these unaudited Notes to Condensed Consolidated Financial Statements for further discussion.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis should be read in conjunction with our unaudited condensed interim consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report and with our audited consolidated financial statements for the fiscal year ended December 31, 2021, as included in our 2021 Annual Report. In addition to historical consolidated financial information, the following discussion includes forward-looking statements about our business, financial condition and results of operations, including discussions about management’s expectations for our business. These statements represent projections, beliefs and expectations based on current circumstances and conditions and our actual results could differ materially from those discussed in these forward-looking statements. Further, these forward-looking statements should not be construed either as assurances of performance or as promises of a given course of action. You should review the sections of this Quarterly Report entitled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of factors that could cause actual results to differ materially – and potentially adversely – from the results described in or implied by the forward-looking statements contained in the following discussion and analysis and elsewhere in this Quarterly Report.

 

Business Overview:

 

We are a vertically integrated Bitcoin mining company principally engaged in enhancing our capabilities to mine Bitcoin. We also provide the critical mining infrastructure for our institutional-scale hosted clients to mine Bitcoin at our Whinstone Facility, with 700 megawatts in total capacity. Additionally, we are beginning development of a second large-scale Bitcoin mining data center at our Corsicana Facility, which is expected to have approximately one gigawatt of capacity for both our Bitcoin mining operations and to host institutional-scale Bitcoin mining and data center clients. Our Whinstone Facility is believed to be the largest Bitcoin mining facility in North America, as measured by developed capacity, and we are currently expanding its capacity.

We operate in an environment which is consistently evolving based on the proliferation of Bitcoin and cryptocurrencies in general. A significant component of our strategy is to effectively and efficiently allocate capital among opportunities that generate the highest return on our capital.

 

Industry Trends

 

During 2022, we observed other companies in the Bitcoin ecosystem experience significant challenges and failure due to the precipitous decline in the price of Bitcoin. We anticipate this trend will likely continue as other companies attempt to shift their business models to operate on compressed margins. The dramatic increase in the price of Bitcoin observed in the market during the last few years caused many companies to over-leverage themselves, operating in an unsustainable way given the instability in the price of Bitcoin. Despite challenges in the ecosystem, Riot continues to focus on building long-term stockholder value by taking strategic action to vertically integrate, expanding the Whinstone Facility and developing our Corsicana Facility. As we grow our business, we continue to focus on deploying our efficient mining fleet, at scale, while realizing benefit of being an owner and operator of our Bitcoin mining facilities.

 

We anticipate that 2022 will continue to be a year of consolidation in the Bitcoin mining industry, and we believe that, given our relative position, liquidity and absence of long-term debt, in the competitive landscape, we are likely positioned to benefit from this consolidation. As a result of any strategic action undertaken by us, our business and financial results may change significantly. We are continuously evaluating strategic opportunities we may decide to undertake as part of our strategic growth initiatives; however, we can offer no assurances that any strategic opportunities which we decide to undertake will be achieved on the schedule or within the budget we anticipate, if at all, in our competitive and evolving industry. See Part I, Item 1A. “Risk Factors” of our 2021 Annual Report for additional discussion regarding potential impacts our competitive and evolving industry may have on our business.

 

Bitcoin Mining

 

The Company’s current focus is on its mining operation, and during the six months ended June 30, 2022, we continued to deploy miners with the objective of increasing the Company’s operational efficiency and performance.

 

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

 

Subsequent to June 30, 2022, we fully exited our Mining operations at the Coinmint Facility. We believe this transition will lower our overall cost of revenues for the Mining business as new miners will be deployed at the Whinstone Facility. See Note 8. “Property and Equipment” to these unaudited Notes to Condensed Consolidated Financial Statements for further discussion.

 

Our Bitcoin mining operations are subject to unique industry risks such as the historical volatility in the demand for, and price of, Bitcoin and changes in the public perception of Bitcoin.

 

 

Miner Purchases and Deployments

 

At June 30, 2022, we had purchased, received and/or deployed the following miners:

 

		Number of miners
Miners deployed at January 1, 2022			30,907
Net miners deployed during the six months ended June 30, 2022			13,813
Miners received during the six months ended June 30, 2022, but not yet deployed			14,369
Miners under contract, but not yet received			56,361
Total miners under contract, deployed or expected to be received, at June 30, 2022			115,450

 

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

In order to take advantage of our low-cost power supply agreement at the Company’s Whinstone Facility and eliminate third-party hosting fees, during the six months ended June 30, 2022, the Company elected not to renew its co-location mining services agreement with Coinmint, which was, therefore, terminated automatically by its terms as of July 8, 2022.

COVID-19

The COVID-19 global pandemic has been unprecedented and unpredictable; its impact is likely to continue to result in significant national and global economic disruption, which may adversely affect our business. Based on our current assessment, however, we do not expect any material impact on our long-term development, our operations, or our liquidity due to the worldwide spread of COVID-19, other than the potential impacts of COVID-19 on global logistics discussed below. We are actively monitoring this situation and the possible effects on our financial condition, liquidity, operations, suppliers, and industry.

In addition, nationally we have experienced and are experiencing varying degrees of inflation, resulting in part from various supply chain disruptions, increased shipping and transportation costs, and increased raw material and labor costs, as well as other disruptions resulting from the continuing COVID-19 pandemic and general global economic conditions. This inflationary impact on our cost structure has contributed to adjustments in operations, ability to obtain materials and retain talent, despite a continued focus on reducing our costs where possible.

 

Global Logistics:

Global supply logistics have caused delays across all channels of distribution. Similarly, we have also experienced delays in certain of our miner delivery schedules and in our infrastructure development schedules due to constraints on the globalized supply chains for miners, electricity distribution equipment and construction materials. Through the date of this Quarterly Report, we have been able to effectively mitigate any delivery delays to avoid materially impacting our miner deployment schedule, however, there are no assurances we will be able to continue to mitigate any such delivery delays in the future. Additionally, the expansion of the Whinstone Facility and the development of our new Corsicana Facility requires large quantities of construction materials, specialized electricity distribution equipment and other component parts that can be difficult to source. We have procured and hold many of the required materials to help mitigate against global supply logistic and pricing concerns. We continue to monitor developments in the global supply chain and assess their potential impact on our expansion plans. See the discussion under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report and under Part I, Item 1A of the 2021 Annual Report for additional discussion regarding potential impacts the global supply chain crisis may have on our operations and plans for expansion.

 

Summary of Mining Results

 

The following table presents additional information about our Mining activities, including Bitcoin production and sales of the Bitcoin the Company mined during the six months ended June 30, 2022, and 2021 ($ in thousands):

 

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

 

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

 

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

 

Revenue:

 

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

 

For the three months ended June 30, 2022 and 2021, Data Center Hosting revenue was $9.8 million, and $2.9 million, respectively. Data Center Hosting revenue includes upfront payments which we record as deferred revenue and generally recognize as services are provided. We provide energized space and operating and maintenance services to third-party mining companies who locate their mining hardware at our Whinstone Facility under long-term contracts. We account for these agreements as a single performance obligation for services being delivered in a series with delivery being measured by daily successful operation of the mining hardware. As such, we recognize revenue over the life of the contract as its series of performance obligations are met. The contracts are recognized in the amount for which we have the right to invoice because we elected the “right to invoice” practical expedient.

 

For the three months ended June 30, 2022, Engineering revenue was $16.9 million, and there was no Engineering revenue for the three months ended June 30, 2021. Engineering revenue is derived from the sale of custom products built to customers’ specifications under fixed-price contracts with one identified performance obligation. Engineering revenues are recognized over time as performance creates or enhances an asset with no alternative use, and for which the Company has an enforceable right to receive compensation as defined under the contract.

Costs and expenses:

 

Cost of revenues for Mining for the three months ended June 30, 2022 and 2021 was $18.0 million and $9.3 million, respectively, representing an increase of approximately $8.7 million. As a percentage of Mining revenue, cost of revenues totaled 39.0% and 29.7% for each of the three months ended June 30, 2022 and 2021, respectively. Cost of revenues consists primarily of direct production costs of mining operations, including electricity, labor, insurance and the variable Coinmint hosting fee, but excluding depreciation and amortization, which are separately stated. The increase of $8.7 million in cost of revenues is primarily due to the increases in variable mining costs, including the variable hosting fees, associated with increases in mining revenues.

 

Cost of revenues for Data Center Hosting for the three months ended June 30, 2022 and 2021 was $15.2 million and $3.7 million, respectively. The costs consisted primarily of direct power costs, with the balance primarily incurred for rent and compensation costs.

 

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

 

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

 

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

 

Change in fair value of our derivative asset for the three months ended June 30, 2022 and 2021, was $60.9 million and $16.4 million, respectively, and was recorded to adjust the fair value of our Power Supply Agreement, which was classified as a derivative asset and measured at fair value on the date of our acquisition of Whinstone.

 

Power curtailment credits for the three months ended June 30, 2022 and 2021, was $5.7 million and $1.1 million, respectively, and represents power sales into the ERCOT marketplace through Whinstone’s participation in ERCOT’s energy demand response programs.

 

Realized gain on sale/exchange of cryptocurrencies for the three months ended June 30, 2022 was $14.4 million. The realized gain or loss on sale/exchange of cryptocurrencies for the three months ended June 30, 2021 was nominal.

 

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

 

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

 

Impairment of goodwill for the three months ended June 30, 2022 was $349.1 million arising from recent adverse changes in business climate, including decreases in the price of Bitcoin and increased volatility of equity markets, as evidenced by declines in the market price of the Company’s securities, those of its peers, and major market indices. There was no impairment recognized during the three months ended June 30, 2021.

 

Other income and expenses:

 

Other expense for the three months ended June 30, 2022 was $6.5 million, and primarily consisted of the unrealized loss on marketable equity securities of $4.8 million and the realized loss on sale of marketable equity securities of $1.6 million recognized in connection with the sale of our shares of Mogo. Other income for the three months ended June 30, 2021 was $28.2 million, which primarily related to a $26.3 million realized gain on sale/exchange of long-term investment recognized in connection with the exchange of our shares of Coinsquare Ltd. (“Coinsquare”) for shares of Mogo.

 

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

 

Revenue:

 

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

 

For the six months ended June 30, 2022 and 2021, Data Center Hosting revenue was $19.5 million, and $2.9 million, respectively. Data Center Hosting revenue includes upfront payments which we record as deferred revenue and generally recognize as services are provided. We provide energized space and operating and maintenance services to third-party mining companies who locate their mining hardware at our Whinstone Facility under long-term contracts. We account for these agreements as a single performance obligation for services being delivered in a series with delivery being measured by daily successful operation of the mining hardware. As such, we recognize revenue over the life of the contract as its series of performance obligations are met. The contracts are recognized in the amount for which we have the right to invoice because we elected the “right to invoice” practical expedient.

 

For the six months ended June 30, 2022, Engineering revenue was $29.1 million, and there was no Engineering revenue for the six months ended June 30, 2021. Engineering revenue is derived from the sale of custom products built to customers’ specifications under fixed-price contracts with one identified performance obligation. Engineering revenues are recognized over time as performance creates or enhances an asset with no alternative use, and for which the Company has an enforceable right to receive compensation as defined under the contract.

 

Other revenue consisting of license fees was not significant in either period.

 

Costs and expenses:

 

Cost of revenues for Mining for the six months ended June 30, 2022 and 2021 was $37.1 million and $16.9 million, respectively, representing an increase of approximately $20.2 million. As a percentage of Mining revenue, cost of revenues totaled 35.6% and 30.9% for each of the six months ended June 30, 2022 and 2021, respectively. Cost of revenues consists primarily of direct production costs of mining operations, including electricity, labor, insurance and the variable Coinmint hosting fee, but excluding depreciation and amortization, which are separately stated. The increase of $20.2 million in cost of revenues is primarily due to the increases in variable mining costs, including the variable hosting fees, associated with increases in mining revenues.

Cost of revenues for Data Center Hosting for the six months ended June 30, 2022 and 2021 was $30.2 million and $3.7 million, respectively. The costs consisted primarily of direct power costs, with the balance primarily incurred for rent and compensation costs.

 

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

 

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

 

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

 

Change in fair value of our derivative asset for the six months ended June 30, 2022 and 2021 was $104.6 million and $16.4 million, respectively, and was recorded to adjust the fair value of our Power Supply Agreement, which was classified as a derivative asset and measured at fair value on the date of our acquisition of Whinstone.

 

Power curtailment credits for the six months ended June 30, 2022 and 2021 was $8.3 million and $1.1 million, respectively, and represents power sales into the ERCOT marketplace through Whinstone’s participation in ERCOT’s energy demand response programs.

 

Realized gain on sale/exchange of cryptocurrencies for the six months ended June 30, 2022 was $23.6 million. The realized gain or loss on sale/exchange of cryptocurrencies for the six months ended June 30, 2021 was nominal.

 

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

 

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

 

Impairment of goodwill for the six months ended June 30, 2022 was $349.1 million arising from recent adverse changes in business climate, including decreases in the price of Bitcoin and increased volatility of equity markets, as evidenced by declines in the market price of the Company’s securities, those of its peers, and major market indices. There was no impairment recognized during the six months ended June 30, 2021.

 

Other income and expenses:

 

Other expense for the six months ended June 30, 2022 was $8.5. million and primarily consisted of the unrealized loss on marketable equity securities of $6.4 million and the realized loss on sale of marketable equity securities of $1.6 million recognized in connection with the sale of our shares of Mogo. Other income for the six months ended June 30, 2021 was $28.4 million, which primarily related to a $26.3 million realized gain on sale/exchange of long-term investment recognized in connection with the exchange of our shares of Coinsquare for shares of Mogo.

 

 

 

Non-GAAP Measures

 

In addition to consolidated U.S. GAAP financial measures, we consistently evaluate our use and calculation of the non-GAAP financial measures, “Adjusted EBITDA” and Adjusted earnings per share (“Adjusted EPS”). Adjusted EBITDA is a financial measure defined as our EBITDA, adjusted to eliminate the effects of certain non-cash and / or non-recurring items, that do not reflect our ongoing strategic business operations. EBITDA is computed as net income before interest, taxes, depreciation, and amortization. Adjusted EBITDA is EBITDA further adjusted for certain income and expenses, which management believes results in a performance measurement that represents a key indicator of the Company’s core business operations of Bitcoin mining. The adjustments include fair value adjustments such as derivative power contract adjustments, equity securities value changes, and non-cash stock-based compensation expense, in addition to financing and legacy business income and expense items. The Company determined to exclude impairments and gains or losses on sales or exchanges of cryptocurrencies from our calculation of Adjusted Non-GAAP EBITDA for all periods presented.

 

Adjusted EPS is a financial measure defined as our EBITDA divided by our diluted weighted-average shares outstanding, adjusted to eliminate the effects of certain non-cash and / or non-recurring items, that do not reflect our ongoing strategic business operations. EBITDA is computed as net income before interest, taxes, depreciation, and amortization. Adjusted EPS is EBITDA further adjusted for certain income and expenses, which management believes results in a performance measurement that represents a key indicator of the Company’s core business operations of Bitcoin mining. The adjustments include fair value adjustments such as derivative power contract adjustments, equity securities value changes, and non-cash stock-based compensation expense, in addition to financing and legacy business income and expense items. The Company determined to exclude impairments and gains or losses on sales or exchanges of cryptocurrencies from our calculation of Adjusted Non-GAAP EPS for all periods presented.

 

We believe Adjusted EBITDA and Adjusted EPS can be important financial measures because they allow management, investors, and our board of directors to evaluate and compare our operating results, including our return on capital and operating efficiencies, from period-to-period by making such adjustments.

 

Adjusted EBITDA and Adjusted EPS are provided in addition to and should not be considered to be a substitute for, or superior to net income, the comparable measure under U.S. GAAP. Further, Adjusted EBITDA and Adjusted EPS should not be considered as an alternative to revenue growth, net income, diluted earnings per share or any other performance measure derived in accordance with U.S. GAAP, or as an alternative to cash flow from operating activities as a measure of our liquidity. Adjusted EBITDA and Adjusted EPS have limitations as analytical tools, and you should not consider such measures either in isolation or as substitutes for analyzing our results as reported under U.S. GAAP.

Reconciliations of Adjusted EBITDA and Adjusted EPS to the most comparable U.S. GAAP financial metric for historical periods are presented in the table below:

 

Reconciliation of GAAP and Non-GAAP Financial Information

 

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