See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements
See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements
See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements
See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements
See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
Note 1. Organization and Operation of Our Business
Nature of Operations:
Riot Blockchain, Inc. operates a cryptocurrency mining operation using specialized computers equipped with application-specific integrated circuit (ASIC) chips (known as “miners”) to solve complex cryptographic algorithms in support of the Bitcoin blockchain (in a process known as “solving a block”) in exchange for cryptocurrency rewards (primarily Bitcoin). The Company has also historically mined Bitcoin cash and litecoin; however, the Company has focused its efforts on mining Bitcoin.
The Company participates in “mining pools” organized by “mining pool operators” in which we share our mining power (known as “hashrate”) with the hashrate generated by other miners participating in the pool to earn cryptocurrency rewards. The mining pool operator provides a service that coordinates the computing power of the independent mining enterprises participating in the mining pool. Fees are paid to the mining pool operator to cover the costs of maintaining the pool. The pool uses software that coordinates the pool members’ mining power, identifies new block rewards, records how much hashrate each participant contributes to the pool, and assigns cryptocurrency rewards earned by the pool among its participants in proportion to the hashrate each participant contributed to the pool in connection with solving a block.
The Company generates substantially all its revenue through two business segments, its Cryptocurrency Mining segment and its Data Center Hosting segment.
Cryptocurrency Mining:
Generally speaking, mining operators with greater hashing power relative to other miners attempting to solve a block have a higher chance of solving the block and receiving a cryptocurrency award. Further, as the market price for Bitcoin has increased, we have observed generally that the relative number of miners and the total hashing power deployed on the Bitcoin blockchain has also increased. Accordingly, we seek to increase our hashing power capacity relative to the total hashing power devoted to the Bitcoin blockchain by acquiring and deploying increasing numbers of the latest generation of more powerful and energy-efficient miners.
As of September 30, 2021, the Company exclusively operated the Antminer series of miners manufactured by Bitmain Technologies Limited (“Bitmain”), which use ASIC chips designed around the 256-bit secure hashing algorithm (SHA-256) used by the Bitcoin blockchain and, therefore, the primary cryptocurrency the Company seeks to mine is Bitcoin.
During the nine months ended September 30, 2021, the Company continued to expand its quantity of miners and the scope of its mining operations, and the acquisition of Whinstone provided the Company with the necessary infrastructure to increase its operational efficiency and performance.
As of September 30, 2021, the Company had deployed a total of 25,646 miners in its mining operations.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
Data Center Hosting:
On May 26, 2021, the Company completed its previously announced strategic acquisition (the “Whinstone Acquisition”) of Whinstone US, Inc. (“Whinstone”) from Northern Data AG, a German stock corporation (the “Seller”).
Whinstone’s data center facility is believed to be the largest single facility, as measured by developed capacity, in North America for Bitcoin mining (the “Whinstone Facility”). The Whinstone Facility provides critical capacity for Riot to deploy its future shipments of Bitcoin mining hardware, in addition to providing an opportunity to expand Whinstone’s hosting business for third-party Bitcoin miners.
In pursuit of achieving the most efficient power strategy, Whinstone combines fixed low-cost power agreements, real-time spot power procurement and income from ancillary power services revenue. Riot benefits from this low-cost energy to maximize its production margins. The combination of Riot and Whinstone allows the Company to rapidly scale its self-mining business at one of the world’s largest mining facilities with power costs among the lowest in the industry.
Whinstone currently hosts Bitcoin mining operations for institutional customers. In addition to hosting revenue, Whinstone also generates engineering and construction services revenue from hosting customers on site, including revenue derived from the fabrication, installation and maintenance services and deployment assistance on immersion cooling technology for Bitcoin mining.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
Note 2. Liquidity and Financial Condition
At September 30, 2021, the Company had approximate balances of cash and cash equivalents of $57.9 million, working capital of $153.5 million, total stockholders’ equity of $770.3 million and an accumulated deficit of $218.4 million. To date, the Company has, in large part, relied on equity financings to fund its operations. The Company believes its current cash on hand is sufficient to meet its operating and capital requirements for at least the next one-year from the date these financial statements are issued.
During the nine months ended September 30, 2021, the Company paid approximately $103.2 million as deposits primarily for miners and as of September 30, 2021, reclassified $46.7 million to property and equipment in connection with the receipt of 18,603 miners received at the Coinmint Facility or the Whinstone Facility.
2021 ATM Offering
As disclosed in Note 12, “Stockholders’ Equity”, the Company entered into a Sales Agreement with Cantor Fitzgerald & Co., B. Riley FBR, Inc., BTIG, LLC, Compass Point Research & Trading, LLC and Roth Capital Partners, LLC (the “Sales Agents”) dated August 31, 2021 (the “Sales Agreement”), pursuant to which the Company may, from time to time, sell up to $600 million in shares of the Company’s common stock through the Sales Agents, acting as the Company’s sales agent and/or principal, in a continuous at-the-market offering (the “2021 ATM Offering”). All sales of the shares in connection with the 2021 ATM Offering have been made pursuant to an effective shelf registration statement on Form S-3 (Registration No. 333-259212) filed with the SEC on August 31, 2021. The Company pays 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. The Company received net proceeds on sales of 1,227,991 shares of common stock under the Sales Agreement of approximately $34.8 million (after deducting $0.9 million in commissions and expenses) at a weighted average price of $29.07 from August 31, 2021 to September 30, 2021.
Subsequent to September 30, 2021, in connection with the Company’s 2021 ATM Offering, the Company received gross proceeds of approximately $564.3 million from the sale of 18.7 million shares of common stock, which completed the 2021 ATM Offering.
2020 ATM Offering
In January 2021, the Company received net proceeds of approximately $82.7 million (after deducting $2.1 million in commissions and expenses) from sales of 4,433,468 shares of its common stock, no par value, at a weighted average gross sales price of $19.13 per share, which were sold in the Company’s December 2020 at-the-market offering of up to $200 million in shares of our common stock, no par value (the “December 2020 ATM Offering”) by H.C. Wainwright & Co., LLC (“H.C. Wainwright”), as the Company’s sales agent, pursuant to the terms of the Second Amendment to the At-the-Market Sales Agreement between the Company and H.C. Wainwright. All shares of the Company’s common stock, no par value, sold under the December 2020 ATM Offering were issued pursuant to the Company’s shelf registration statement on Form S-3 (Registration No. 333-251149), filed with the SEC on December 4, 2020 (the “December 2020 Registration Statement”).
COVID-19:
The COVID-19 global pandemic has been unprecedented and unpredictable and its impact is likely to continue to result in significant national and global economic disruption, which may adversely affect our business. Although the Company has experienced some changes to its miner shipments due to disruptions in the global supply chain, the Company however does not expect any material impact on its long-term strategic plans, its operations, or its liquidity due to the impacts of COVID-19. However, the Company is actively monitoring this situation and the possible effects on its financial condition, liquidity, operations, suppliers, and the industry.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
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 interim consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the SEC. In the opinion of management, the accompanying unaudited condensed interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of such interim results. Amounts are in thousands except for share, per share and miner amounts.
The results for the unaudited condensed interim consolidated statements of operations are not necessarily indicative of results to be expected for the year ending December 31, 2021 or for any future interim period. The unaudited condensed interim consolidated financial statements do not include all of the information and notes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed interim consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2020 and notes thereto included in the Company’s 2020 Annual Report on Form 10-K filed with the SEC on March 31, 2021.
The accompanying unaudited condensed interim consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. They include the results of operations and financial condition of Whinstone beginning on May 26, 2021. See Note 4, “Acquisitions”, for additional information on our acquisition of Whinstone. All intercompany balances and transactions have been eliminated in consolidation.
Reclassifications:
Certain prior period amounts have been reclassified to conform to the current period presentation. The reclassifications did not have a material impact on the Company's condensed interim consolidated financial statements and related disclosures. The impact on any prior period disclosures was immaterial.
Use of Estimates:
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ significantly from those estimates. The most significant accounting estimates inherent in the preparation of the Company’s financial statements include estimates associated with valuing contingent consideration for a business combination and periodic reassessment of its fair value, allocating the fair value of purchase consideration to assets acquired and liabilities assumed in business acquisitions, revenue recognition, valuing the derivative asset classified under Level 3 fair value hierarchy, determining the useful lives and recoverability of long-lived assets, impairment analysis of goodwill and finite-lived intangibles, stock-based compensation, and the valuation allowance associated with the Company’s deferred tax assets.
Significant Accounting Policies:
For a detailed discussion about the Company’s significant accounting policies, see the Company’s December 31, 2020 consolidated financial statements included in its 2020 Annual Report.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
Revenue Recognition
Cryptocurrency mining
The Company recognizes revenue under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, (“ASC 606”). The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
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Step 1: Identify the contract with the customer
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Step 2: Identify the performance obligations in the contract
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Step 3: Determine the transaction price
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Step 4: Allocate the transaction price to the performance obligations in the contract
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Step 5: Recognize revenue when the Company satisfies a performance obligation
In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met: The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).
If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:
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Variable consideration
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Constraining estimates of variable consideration
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The existence of a significant financing component in the contract
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Noncash consideration
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Consideration payable to a customer
Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.
The Company has entered into digital asset mining pools by executing contracts, as amended from time to time, with the mining pool operators to provide computing power to the mining pool. The contracts are terminable at any time by either party and the Company’s enforceable right to compensation only begins when the Company provides computing power to the mining pool operator. In exchange for providing computing power, the Company is entitled to a fractional share of the fixed cryptocurrency award the mining pool operator receives (less digital asset transaction fees to the mining pool operator which are immaterial and are recorded as a deduction from revenue), for successfully adding a block to the blockchain. The terms of the agreement provide that neither party can dispute settlement terms after thirty-five days following settlement. The Company’s fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
Providing computing power to solve complex cryptographic algorithms in support of the Bitcoin blockchain (in a process known as “solving a block”) is an output of the Company’s ordinary activities. The provision of providing such computing power is the only performance obligation in the Company’s contracts with mining pool operators. The transaction consideration the Company receives, if any, is noncash consideration, which the Company measures at fair value on the date received, which is not materially different than the fair value at contract inception or the time the Company has earned the award from the pools. The consideration is all variable. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the mining pool operator successfully places a block (by being the first to solve an algorithm) and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized. There is no significant financing component in these transactions.
Fair value of the cryptocurrency award received is determined using the quoted price of the related cryptocurrency at the time of receipt. Each individual unit of cryptocurrency held by the Company is a separate unit of account. There is currently no specific definitive guidance under GAAP or alternative accounting framework for the accounting for cryptocurrencies recognized as revenue or held, and management has exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance is enacted by the Financial Accounting Standards Board (“FASB”), the Company may be required to change its policies, which could have an effect on the Company’s consolidated financial position and results from operations.
Data center hosting
In general, we provide power for our data center customers on a variable (sub-metered) basis. A customer pays us variable monthly fees for the specific amount of power utilized at rates specified in each contract, subject to certain minimums. We recognize variable power revenue each month as the uncertainty related to the consideration is resolved, power is provided to our customers, and our customers utilize the power (the customer simultaneously receives and consumes the benefits of the Company’s performance).
We have determined that our contracts contain a series of performance obligations which qualify to be recognized under a practical expedient available known as the “right to invoice.” This determination allows variable consideration in such contracts to be allocated to and recognized in the period to which the consideration relates, which is typically the period in which it is billed, rather than requiring estimation of variable consideration at the inception of the contract. We have also determined that the contracts contain a significant financing component because the timing of revenue recognition differs from the timing of invoicing by a period, exceeding one year.
The Company also installs certain hosted customers’ mining equipment and bills the customer at a fixed fee per piece of equipment or at an hourly rate. Revenue is recognized upon completion of the installation.
We generate engineering and construction services revenue from the fabrication and deployment of immersion cooling technology for Bitcoin mining customers. We bill the customer at a fixed monthly fee or at an hourly rate. For the construction of customer-owned equipment, revenue is recognized upon completion of each phase of the construction project, as defined in each contract. For construction of assets owned by Whinstone but paid for and used by the customer during the term of their hosting contract, revenue is recognized on a straight-line basis over the remaining life of the contract.
Maintenance services include cleaning, cabling and other services to maintain the customers’ equipment. We bill the customer at a fixed monthly fee or at an hourly rate. Revenue is recognized as these services are provided.
Deferred revenue is primarily from advance payments received and is recognized on a straight-line basis over the remaining life of the contract or upon completion of the installation of the customers’ equipment.
Our primary hosting contracts contain Service Level Agreement clauses, which guarantee a certain percentage of time the power will be available to our customer. In the rare case that we may incur penalties under these clauses, we account for payments made to customers in accordance with ASC 606-10-32-25, Consideration Payable to a Customer, which requires the payment be recognized as variable consideration and a reduction of the transaction price and, therefore, of revenue, when not in exchange for a good or service from the customer.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
Other revenue
Other revenue is revenue recognized from an upfront license fee generated from our legacy animal health business. The upfront fee was recorded as deferred revenue and is being amortized into revenue over the term of the License Agreement.
Power Supply Contract and Demand Response Services
In May 2020, Whinstone entered into a Power Supply Agreement with TXU Energy Retail Company LLC (“TXU”) to provide the delivery of a fixed amount of electricity by TXU to Whinstone (via the facility owned by Oncor Electric Delivery Company, LLC (“Oncor”)) for a fixed price through April 30, 2030. The Power Supply Agreement provides a consistent and sufficient supply of electricity at the Whinstone Facility. If Whinstone uses more electricity than contracted, the cost of the excess is incurred at the current spot rate. Concurrently, Whinstone entered into a contract with Oncor for the extension of delivery system transmission/substation facilities to facilitate delivery of the electricity to the Whinstone Facility (the “Facilities Agreement”). Power costs incurred under this contract are determined on an hourly basis using settlement information provided by the Electric Reliability Council of Texas (“ERCOT”) and are recorded in cost of revenues, data center hosting in our unaudited condensed interim consolidated statements of operations.
The demand response services program (“Demand Response Service”) provides the ERCOT market with valuable reliability and economic services by helping to preserve system reliability, enhancing competition, mitigating price spikes, and encouraging the demand side of the market to respond better to wholesale price signals. In collaboration with market participants such as the Company, ERCOT has developed demand response products and services for customers that have the ability to reduce or modify electricity use in response to instructions or signals. Market participants with electrical loads like Whinstone may participate in the Demand Response Service program directly by offering their electrical loads into the ERCOT markets, or indirectly by voluntarily reducing their energy usage in response to increasing wholesale prices.
Depending on the spot market price of electricity, under this program, we opportunistically sell electricity back to ERCOT in exchange for cash payments, rather than providing the power to our customers during these peak times in order to most efficiently manage our operating costs. We sold approximately $3.7 million in electricity back to ERCOT during the period from May 26, 2021 (the “Acquisition Date”) through September 30, 2021. These sales back to ERCOT are recorded as part of the change in fair value of derivative asset in our unaudited condensed interim consolidated statements of operations.
While we manage operating costs at the Whinstone Facility in part by periodically selling unused or uneconomical power in the market back to ERCOT, we do not consider such actions trading activities. That is, we do not engage in speculation in the power market as part of our ordinary activities. Because the Demand Response Services programs allow for net settlement, we have determined the Power Supply Agreement meets the definition of a derivative under ASC 815, Derivatives and Hedging, (“ASC 815”). However, because we have the ability to sell the power back to the grid rather than take physical delivery, physical delivery is not probable through the entirety of the contract and therefore, we do not believe the normal purchases and normal sales scope exception applies to the Power Supply Agreement. Accordingly, the Power Supply Agreement (the non-hedging derivative contract) is recorded at estimated fair value each reporting period with the change in the fair value recorded in change in fair value of derivative asset in our unaudited condensed interim consolidated statements of operations.
In February 2021, the State of Texas experienced an extreme and unprecedented winter weather event that resulted in prolonged freezing temperatures and caused an electricity generation shortage that was severely disruptive to the whole state. While demand for electricity reached extraordinary levels due to the extreme cold, the supply of electricity significantly decreased in part because of the inability of certain power generation facilities to supply electric power to the grid. Due to the extreme market price of electricity during this time, at the request of ERCOT, Whinstone stopped supplying power to its customers and instead sold power back to the grid.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
In April 2021, under the provisions of the TXU Power Supply Agreement, and as a result of the weather event, Whinstone entered into a Qualified Scheduling Entity (“QSE”) Letter Agreement, which resulted in Whinstone being entitled to receive approximately $125.1 million for its power sales during the February winter storm, all under the terms and conditions of the QSE Letter Agreement. Whinstone received cash of $29.0 million in April 2021 (after deducting $10.0 million in power management fees owed by Whinstone), approximately $59.7 million is scheduled to be credited against future power bills of Whinstone beginning in 2022 and the remaining $26.3 million is contingent upon ERCOT’s future remittance. These amounts are gross before fair value adjustments and expenses incurred by Whinstone for power management fees noted above and customer settlements. The fair value of the settlement agreement was estimated and recognized as an asset as part of acquisition accounting. Additionally, pursuant to the Northern Data stock purchase agreement, the Company agreed to pay Seller additional consideration in cash in the amount of the future power credits, net of income taxes, when and if realized by Whinstone. See Note 4, “Acquisitions”.
Fair Value Measurement
The Company follows the accounting guidance in ASC 820, Fair Value Measurement, (“ASC 820”) for its fair value measurements of financial assets and liabilities measured at fair value on a recurring basis. Under this accounting guidance, fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.
The accounting guidance requires fair value measurements be classified and disclosed in one of the following three categories:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Observable inputs other than Level 1 prices, for similar assets or liabilities that are directly or indirectly observable in the marketplace.
Level 3: Unobservable inputs which are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The Company’s derivative asset related to its Power Supply Agreement is classified within Level 3 of the fair value hierarchy because the fair value is estimated by utilizing valuation models and significant unobservable inputs. The Company’s only financial liability based on Level 3 inputs is a contingent consideration arrangement related to its acquisition of Whinstone. The Company is contractually obligated to pay contingent consideration payments to the Seller if Whinstone realizes certain power credits. (See Note 14, “Fair Value Measurement”)
The Company will update its assumptions each reporting period based on new developments and record such amounts at fair value based on the revised assumptions until the agreements expire or contingency is resolved, as applicable.
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. A committee consisting of the Company’s executives is determined to be the CODM. The CODM reviews financial information and makes resource allocation decisions at the consolidated group level. The Company has two operating segments as of September 30, 2021. See Note 16, “Segment Information”.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
Business Combinations
The Company applies the provisions of ASC Topic 805, Business Combinations, (“ASC 805”) in the accounting for acquisitions of businesses. ASC 805 requires us to use the acquisition method of accounting by recognizing the identifiable tangible and intangible assets acquired and liabilities assumed, and any non-controlling interest in the acquired business, measured at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the aforementioned amounts. Contingent consideration is included within the purchase price and is recognized at its fair value on the acquisition date. A liability resulting from contingent consideration is remeasured to fair value as of each reporting date until the contingency is resolved, and subsequent changes in fair value are recognized in earnings. Contingent consideration is recorded in long-term liabilities in our unaudited condensed interim consolidated balance sheets.
While we use our best estimates and assumptions to accurately apply preliminary values to assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, these estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of the assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in our consolidated statements of operations.
Accounting for business combinations requires management to make significant estimates and assumptions, especially at the acquisition date, including estimates for intangible assets, contractual obligations assumed, pre-acquisition contingencies, and contingent consideration, where applicable. Although we believe the assumptions and estimates we have made have been reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain of the intangible assets we have acquired include; future expected cash flows from customer contracts, discount rates, and estimated market changes in the value of the Power Supply Agreement, which is accounted for as a nonhedged derivative contract. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates, or actual results.
Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.
Goodwill and Other Intangible Assets
Goodwill represents the cost of a business acquisition in excess of the fair value of the net assets acquired. The Company determined that it has two reporting units for goodwill impairment testing purposes, Cryptocurrency Mining and Data Center Hosting, which is consistent with internal management reporting and management’s oversight of operations. Goodwill is not amortized and is reviewed for impairment annually as of December 31 or more frequently if facts and circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. We use both qualitative and quantitative analyses in making this determination. Our analyses require significant assumptions and judgments, including assumptions about future economic conditions, revenue growth, and operating margins, among other factors. Example events or changes in circumstances considered in the qualitative analysis, many of which are subjective in nature, include: a significant negative trend in our industry or overall economic trends, a significant change in how we use the acquired assets, a significant change in or our business strategy, a significant decrease in the market value of the asset, a significant change in regulations or in the industry that could affect the value of the asset, and a change in segments. If it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company performs the quantitative test to identify and measure the amount of goodwill impairment loss. The Company compares the fair value of the reporting unit with its carrying amount. If the carrying amount exceeds the fair value, goodwill of the reporting unit is considered impaired and that excess is recognized as a goodwill impairment loss.
Intangible assets with finite lives are comprised of customer contracts that are amortized on a straight-line basis over their expected useful lives, which is their contractual term. The Company performs assessments to determine whether finite-lived classification is still appropriate at least annually. The carrying value of finite-lived assets and their remaining useful lives are also reviewed at least annually to determine if circumstances exist which may indicate a potential impairment or revision to the amortization period. A finite-lived intangible asset is considered to be impaired if its carrying value exceeds the estimated future undiscounted cash flows to be derived from it. We exercise judgment in selecting the assumptions used in the estimated future undiscounted cash flows analysis. Impairment is measured by the amount that the carrying value exceeds fair value.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
The use of different estimates or assumptions could result in significantly different fair values for our reporting units and intangible assets.
We did not identify any impairment during the three or nine months ended September 30, 2021 and 2020.
Investment in marketable equity securities
Our investment in marketable equity securities consists entirely of common shares of Mogo, Inc. (NASDAQ: MOGO), resulting from the April and May 2021 transactions. (See Note 7, “Investments in Marketable Equity Securities”). The Company accounted for this investment in accordance with ASC 321, Investments-Equity Securities, (“ASC 321”) due to the shares having a readily determinable fair value since they are traded on NASDAQ and have significant average daily volume traded. As a result, the investment is required to be measured at fair value at each balance sheet date with unrealized holding gains and losses recorded in other income (expense).
Lease Accounting
The Company accounts for its leases under ASC 842, Leases (“ASC 842”). Accordingly, the Company determines whether an arrangement contains a lease at the inception of the arrangement. If a lease is determined to exist, the term of such lease is assessed based on the date on which the underlying asset is made available for the Company’s use by the lessor. The Company’s assessment of the lease term reflects the non-cancelable term of the lease, inclusive of any rent-free periods and/or periods covered by early-termination options which the Company is reasonably certain of not exercising, as well as periods covered by renewal options which the Company is reasonably certain of exercising. The Company also determines lease classification as either operating or finance at lease commencement, which governs the pattern of expense recognition and the presentation reflected in the consolidated statements of operations over the lease term.
For leases with a term exceeding 12 months, a lease liability is recorded on the Company’s consolidated balance sheet at lease commencement reflecting the present value of its fixed minimum payment obligations over the lease term. A corresponding right-of-use (“ROU”) asset equal to the initial lease liability is also recorded, adjusted for any prepaid rent and/or initial direct costs incurred in connection with execution of the lease and reduced by any lease incentives received. For purposes of measuring the present value of its fixed payment obligations for a given lease, the Company uses its incremental borrowing rate, determined based on information available at lease commencement, as rates implicit in its leasing arrangements are typically not readily determinable. The Company's incremental borrowing rate reflects the rate it would pay to borrow on a secured basis and incorporates the term and economic environment of the associated lease.
For the Company’s operating leases, fixed lease payments are recognized as lease expense on a straight-line basis over the lease term. For leases with a term of 12 months or less, any fixed lease payments are recognized on a straight-line basis over the lease term and are not recognized on the Company's consolidated balance sheet as an accounting policy election. Leases qualifying for the short-term lease exception were insignificant. Variable lease costs are recognized as incurred.
Income Taxes
The Company accounts for income taxes under the asset and liability method, in which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. A valuation allowance is required to the extent any deferred tax assets may not be realizable.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
ASC Topic 740, Income Taxes, (“ASC 740”), also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s consolidated financial statements. The Company believes that its income tax positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in material changes to its financial position.
Deferred Tax Liability
Upon the acquisition of Whinstone, the Company recognized a deferred tax liability of approximately $37.8 million consisting of the tax basis differences of derivative related assets acquired, totaling $18.8 million in deferred income tax liability and acquisition fair value adjustments for fixed assets and non-deductible intangible assets totaling $19.0 million in deferred income taxes, on acquired fair value of such assets, using a blended federal and state statutory rate of 21%. Deferred income tax expense for the period ended September 30, 2021, relates to the tax effect of the post-acquisition change in derivative related assets. The following is a summary of the deferred tax liability during the nine months ended September 30, 2021:
|
Beginning balance at January 1, 2021
|
|
$
|
-
|
|
|
|
Acquisition of Whinstone
|
|
|
37,761
|
|
|
|
Deferred income tax expense
|
|
|
3,730
|
|
|
|
Ending balance at September 30, 2021
|
|
$
|
41,491
|
|
|
Income (loss) Per Share
Basic net income (loss) per share (“EPS”) of common stock is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The Company excludes its unvested restricted share units (“RSUs”) from the net loss per share calculation.
For the nine months ended September 30, 2021, the Company recorded net income and therefore, earnings per share was calculated using the treasury stock method. Dilutive potential common shares include outstanding stock options, restricted stock shares, warrants and Series B Preferred Stock. Potentially dilutive shares are determined by applying the treasury stock method to the assumed exercise of outstanding stock options, restricted stock awards and warrants. Potentially dilutive shares issuable upon conversion of our Series B Preferred Stock are calculated using the if-converted method.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
The following is a reconciliation of the numerator and denominator of the diluted net income (loss) per share computations for the periods presented below (in thousands except for share and per share amounts):
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Basic and diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(15,343
|
)
|
|
$
|
(1,717
|
)
|
|
$
|
11,524
|
|
|
$
|
(16,584
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average number of shares outstanding
|
|
|
96,064,036
|
|
|
|
44,773,870
|
|
|
|
89,350,180
|
|
|
|
36,017,927
|
|
|
Add:
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
Options to purchase common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
10,640
|
|
|
|
-
|
|
|
Unvested restricted stock awards
|
|
|
-
|
|
|
|
-
|
|
|
|
533,220
|
|
|
|
-
|
|
|
Convertible Series B preferred shares
|
|
|
-
|
|
|
|
-
|
|
|
|
2,334
|
|
|
|
-
|
|
|
Diluted weighted average number of shares outstanding
|
|
|
96,064,036
|
|
|
|
44,773,870
|
|
|
|
89,896,374
|
|
|
|
36,017,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
(0.16
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
0.13
|
|
|
$
|
(0.46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
(0.16
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
0.13
|
|
|
$
|
(0.46
|
)
|
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, 2021 and 2020 because their inclusion would be anti-dilutive are as follows:
|
|
|
|
September 30, 2021
|
|
|
|
September 30, 2020
|
|
|
Warrants to purchase common stock
|
|
|
63,000
|
|
|
|
3,354,257
|
|
|
Options to purchase common stock
|
|
|
12,000
|
|
|
|
12,000
|
|
|
Unvested restricted stock awards
|
|
|
4,224,016
|
|
|
|
1,217,893
|
|
|
Convertible Series B preferred shares
|
|
|
2,199
|
|
|
|
4,199
|
|
|
Total
|
|
|
4,301,215
|
|
|
|
4,588,349
|
|
Recently Issued and Adopted Accounting Pronouncements:
In May 2021, the FASB issued Accounting Standards Update (“ASU”) 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40), (“ASU 2021-04”). This ASU reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. This ASU provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses: (1) how an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; (2) how an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. This ASU will be effective for all entities for fiscal years beginning after December 15, 2021. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted, including adoption in an interim period. The adoption of ASU 2021-04 is not expected to have a material impact on the Company’s financial statements or disclosures.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequences of the change to its consolidated financial statements and assures that there are proper controls in place to ascertain that the Company’s unaudited condensed interim consolidated financial statements properly reflect the change.
Note 4. Acquisitions
Acquisition of Whinstone US, Inc.
On May 26, 2021, the Company acquired 100% of the equity interests of Whinstone US, Inc., the owner and operator of what is believed to be North America’s largest Bitcoin mining and hosting facility, for approximately $460 million. The acquisition of Whinstone diversifies Riot’s revenues and catapults Riot into a market-leading position in the Bitcoin mining and hosting business. The assets and operations of Whinstone increases the scale and scope of Riot’s operations, which is a foundational element in the Company’s strategy to become an industry-leading Bitcoin mining platform on a global scale.
The acquisition-date fair value of the total consideration transferred was comprised of $80 million of cash, adjusted for net working capital and other items, and 11.8 million shares of the Company’s common stock, no par value, with a fair value of approximately $326 million. As part of cash at closing, net debt outstanding from Whinstone to its parent (Seller) totaling approximately $38 million was repaid as part of cash paid and certain seller transaction costs were paid. The Company also agreed to pay Seller up to approximately $86 million (undiscounted) in additional consideration if certain future power credits are realized by Whinstone.
The purchase price was funded through a combination of existing cash and issuance of equity securities.
The Whinstone Acquisition was accounted for using the acquisition method of accounting in accordance with ASC 805, which requires recognition of assets acquired and liabilities assumed at their respective fair values on the date of acquisition. As of September 30, 2021, the Company has completed a preliminary allocation of the purchase consideration. Therefore, the allocation of the purchase price to assets acquired and liabilities assumed is based on provisional estimates and is subject to continuing management analysis, with assistance from third party valuation advisors. The Company expects to finalize the valuation of these assets and liabilities, and consideration transferred, as soon as practicable, but not later than one year from the Acquisition Date. Any changes to the preliminary estimates of the fair value of the assets acquired and liabilities assumed will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill.
During the period ended September 30, 2021, the Company continued reviewing its valuations of the assets acquired and liabilities assumed in the May 26, 2021 acquisition of Whinstone based on new information obtained about facts and circumstances that existed as of the acquisition date. During the three months ended September 30, 2021, the Company recorded a preliminary measurement period adjustment of approximately $0.2 million to increase its acquisition date right of use asset, with the corresponding adjustment to goodwill.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
Any necessary adjustments will be finalized within one year from the date of acquisition (in thousands):
|
Cash and cash equivalents
|
|
$
|
10,400
|
|
|
Accounts receivable
|
|
|
1,072
|
|
|
Prepaid expenses and other current assets
|
|
|
2,176
|
|
|
Property and equipment
|
|
|
78,207
|
|
|
Intangible assets
|
|
|
90,291
|
|
|
Derivative asset
|
|
|
13,967
|
|
|
Right of use asset
|
|
|
6,464
|
|
|
Security deposits
|
|
|
1,775
|
|
|
Future power credits(1)
|
|
|
82,953
|
|
|
Accounts payable
|
|
|
(12,853
|
)
|
|
Accrued expenses
|
|
|
(504
|
)
|
|
Deferred revenues and customer deposits
|
|
|
(34,856
|
)
|
|
Operating lease liabilities
|
|
|
(8,184
|
)
|
|
Deferred tax liabilities
|
|
|
(37,761
|
)
|
|
Total identifiable assets and liabilities acquired
|
|
|
193,147
|
|
|
Goodwill(2)
|
|
|
267,237
|
|
|
Total purchase consideration
|
|
$
|
460,384
|
|
The $460.4 million total purchase price consideration consisted of $326.2 million fair value of Riot common shares issued, a $53.0 million cash payment (including $38.1 million of debt payoff and certain Seller transaction costs), an $83.0 million contingent purchase price payable to the Seller and other net items of $(1.7 million).
|
(1)
|
Future power credits of $83.0 million are associated with the contingent purchase price payable.
|
|
(2)
|
Goodwill represents the excess of total purchase consideration over the preliminary fair value of the underlying assets acquired and liabilities assumed. Goodwill is attributable to the assembled workforce of experienced personnel at Whinstone and synergies expected to be achieved from the combined operations of Riot and Whinstone. None of the goodwill recognized is expected to be deductible for tax purposes. We assigned the goodwill to our data center hosting segment. See Note 16, “Segment Information”.
|
As part of the share purchase agreement Riot entered into with the Seller in connection with the Whinstone Acquisition, Riot is obligated to Seller to pay up to a maximum amount of $86 million, net of income taxes as defined under the stock purchase agreement (undiscounted) of additional consideration if certain power credits are received or realized by Whinstone. Those power credits arose from the February weather event. The purchase price included the estimated fair value of the contingent consideration at the Whinstone Acquisition Date of approximately $83 million. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820. The significant assumptions used to estimate the fair value are described in Note 14, “Fair Value Measurements”. These assumptions for the power credits whose utilization by Whinstone is contingent on ERCOT’s future power billings, include the timing of receipt or realization of the power credits, estimates of future power consumption, the discount rate and credit risk of the Company and the owing party (ERCOT).
The fair value of the acquired trade receivables was determined to be the net realizable amount of the closing date book value of $1.0 million.
The fair value of the acquired long-term other asset of approximately $83 million relates to the estimated amount of power credits due Whinstone from the February weather event. We estimated the fair value of the power credits to be the same as that of the contingent consideration arrangement because the Company is required to remit to the Seller in cash as additional consideration the amount of such power credits received or realized by Whinstone. See discussion above on contingent consideration.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
Intangible assets acquired consist of customer contracts, with an estimated useful average life of approximately 8.5 years based on the then remaining lives of the customer contracts. Fair value of the contracts was estimated by applying an income approach – multi period excess earnings method. The fair value was determined by calculating the present value of estimated future operating cash flows generated from the existing customers less costs to realize the revenue. The Company applied a discount rate of 21%, which reflected the nature of the assets as they relate to the risk and uncertainty of the estimated future operating cash flows. Other significant assumptions used to estimate the fair value of the customer contracts include an assumed income tax rate of 21% and for expiring contracts an estimated renewal probability of 80%. The future quarterly straight-line amortization of the identified intangible assets is estimated to be approximately $2.6 million.
The derivative asset acquired pertains to Whinstone’s Power Supply Agreement. Fair value of the contract of approximately $14 million was estimated by applying a discounted debt-free cash flow approach. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820. The significant assumptions used to estimate 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.
The fair value of property and equipment was estimated by applying the cost approach. The cost approach uses the replacement or reproduction cost as an indicator of fair value. The assumptions of the cost approach include replacement cost new, projected capital expenditures, and physical deterioration factors including economic useful life, remaining useful life, age, and effective age.
The operating results of Whinstone have been included in the Company's unaudited condensed interim consolidated statements of operations since the Acquisition Date. During the three and nine months ended September 30, 2021, the Company recognized $0.6 million and $18.9 million, respectively, of acquisition-related costs that were expensed as incurred.
The financial results of the acquisition have been included in the Company’s consolidated financial statements from the closing of the acquisition. From the May 26, 2021 acquisition date through September 30, 2021, Whinstone’s total revenue and net income was approximately $14.1 million and $13.8 million, respectively. Amortization expense amounted to approximately $4.9 million and $5.8 million for the three and nine months ended September 30, 2021, respectively.
Pro Forma Information (Unaudited)
The following unaudited pro forma financial information summarizes the combined results of operations for Riot and Whinstone as if the companies were combined as of January 1, 2020. The unaudited pro forma information does not reflect the effect of costs or synergies that may result from the acquisition. The pro forma information excludes acquisition-related costs of $0.6 million and $18.9 million during the three and nine months ended September 30, 2021, respectively. The pro forma information does not purport to be indicative of the results of operations that actually would have resulted had the combination occurred on January 1, 2020, or of future results of the consolidated entities. This unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of future operating results of the combined company.
|
|
|
Three Months
Ended September 30,
|
|
|
Nine Months
Ended September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Total revenue
|
|
$
|
64,807
|
|
|
$
|
5,847
|
|
|
$
|
132,693
|
|
|
$
|
11,828
|
|
|
Net income (loss)
|
|
$
|
(14,791
|
)
|
|
$
|
(8,229
|
)
|
|
$
|
107,360
|
|
|
$
|
(53,025
|
)
|
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
Note 5. Revenue from Contracts with Customers
We recognize revenue when we transfer promised services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those services.
Disaggregated revenue
The following table presents the Company’s revenues disaggregated into categories based on the nature of such revenues (in thousands):
Schedule of Disaggregated Revenue
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Cryptocurrency Mining
|
|
$
|
53,590
|
|
|
$
|
2,437
|
|
|
$
|
108,213
|
|
|
$
|
6,717
|
|
|
Data Center Hosting
|
|
|
11,193
|
|
|
|
-
|
|
|
|
14,067
|
|
|
|
-
|
|
|
Other
|
|
|
25
|
|
|
|
25
|
|
|
|
73
|
|
|
|
73
|
|
|
Total revenue
|
|
$
|
64,808
|
|
|
$
|
2,462
|
|
|
$
|
122,353
|
|
|
$
|
6,790
|
|
Cryptocurrency Mining
Providing computing power to solve complex cryptographic algorithms in support of the Bitcoin blockchain (in a process known as “solving a block”) is an output of the Company’s ordinary activities. The provision of providing such computing power is the only performance obligation in the Company’s contracts with mining pool operators, its customers. The contracts are terminable at any time by either party and the Company’s enforceable right to compensation only begins when the Company provides computing power to the mining pool operator. The transaction consideration the Company receives, if any, is noncash consideration, which the Company measures at fair value on the date received, which is not materially different than the fair value at the contract inception or the time the Company has earned the award from the pools. The consideration is all variable. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the mining pool operator successfully places a block (by being the first to solve an algorithm) and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized. There is no significant financing component in these transactions.
Fair value of the cryptocurrency award received is determined using the quoted price on the Company’s primary exchange of the related cryptocurrency at the time of receipt.
Data Center Hosting
The Company provides energized space and operating and maintenance services to third-party mining companies who locate their mining hardware at its Rockdale, Texas facility. The Company accounts 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, the Company recognizes revenue over the life of the contract as its series of performance obligations are met. The contracts are recognized in the amount for which the Company has the right to invoice because the Company elected the “right to invoice” practical expedient.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
Hosting contracts typically require payment in advance of the service delivery. The Company recognizes such payments as deferred revenue until its performance obligations are met, at which time the Company recognizes the revenue. The Company does not have any significant warranty obligations. We have determined that the contracts contain a significant financing component because of the expected length of time between the transfer of services and receipt of consideration and the prevailing market interest rates. Because the customer makes a payment in advance for the hosting services, the promised amount of consideration is adjusted (increased) over the financing term. Until services have been transferred, the Company adjusts the promised amount of consideration and accretes the contract liability (deferred revenue) by recognizing interest expense. The discount rate applied is that which would be reflected in a separate financing transaction between us and the customer at contract inception. This rate reflects the credit characteristics of the customer.
Revenue from the provision of installation services of certain hosted customers’ mining equipment is also included in data center hosting revenue. We bill the customer at a fixed fee per piece of equipment or at an hourly rate. The Company applies the “right to invoice” practical expedient to fees billed at an hourly rate. Revenue is recognized upon completion of the installation.
We generate engineering and construction services revenue from the fabrication and deployment of immersion cooling technology for Bitcoin mining customers. We bill the customer a total fixed fee or at an hourly rate, which is billed monthly as the project is completed. For the construction of customer-owned equipment, revenue is recognized upon completion of each phase of the construction project, as defined in each contract. For construction of assets owned by Whinstone but used by the customer during the term of their hosting contract, revenue is recognized on a straight-line basis over the remaining life of the contract.
Maintenance services include cleaning, cabling and other services to maintain the customers’ equipment. We bill the customer at a fixed monthly fee or at an hourly rate. The Company applies the “right to invoice” practical expedient to fees billed at an hourly rate. Revenue is recognized as these services are provided.
Other revenue
Other revenue is revenue recognized from an upfront license fee generated from our legacy animal health business. The upfront fee was recorded as deferred revenue and is being amortized into revenue over the term of the License Agreement.
Contract balances
For the nine months ended September 30, 2021 and 2020, the Company did not recognize material bad-debt expense and there were no material contract assets recorded on the accompanying condensed interim consolidated balance sheets as of September 30, 2021 and December 31, 2020.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
The Company’s contract liabilities primarily relate to upfront payments and consideration received from customers for data center hosting and the upfront license fee generated from our legacy animal health business. The table below presents changes in the total deferred revenue liability, for the three and nine months ended September 30, 2021 and 2020:
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Beginning balance
|
|
$
|
728
|
|
|
$
|
825
|
|
|
$
|
776
|
|
|
$
|
873
|
|
|
Acquisition, net of revenue recognized
|
|
|
22,099
|
|
|
|
-
|
|
|
|
22,099
|
|
|
|
-
|
|
|
Revenue recognized that was included in the beginning balance
|
|
|
(25
|
)
|
|
|
(25
|
)
|
|
|
(73
|
)
|
|
|
(73
|
)
|
|
Ending balance
|
|
$
|
22,802
|
|
|
$
|
800
|
|
|
$
|
22,802
|
|
|
$
|
800
|
|
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 cryptocurrency mining are not included because the Company elected the practical expedient to not disclose amounts related to contracts with a duration of one year or less.
Data center hosting revenue – remaining performance obligation
The table below presents estimated data center hosting revenue expected to be recognized in the future related to the unsatisfied portion of the performance obligation at September 30, 2021:
|
(in thousands)
|
|
Remainder of 2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
2025
|
|
|
Thereafter
|
|
|
Total
|
|
|
Data center hosting(1)(2)
|
|
$
|
845
|
|
|
$
|
2,362
|
|
|
$
|
2,362
|
|
|
$
|
2,362
|
|
|
$
|
2,362
|
|
|
$
|
11,806
|
|
|
$
|
22,099
|
|
|
(1)
|
Data center hosting revenue primarily includes upfront payments which the Company generally recognizes as services are provided.
|
|
(2)
|
The Company elected the “right to invoice” practical expedient and therefore does not include amounts related to (1) the satisfaction of performance obligations recognized in the amount invoiced, and (2) variable consideration related to future services.
|
Other revenue – remaining performance obligation
As of September 30, 2021 and 2020, the aggregate amount remaining of the upfront license fee, for the right to access certain intellectual property relating to the Company’s Animal Health assets, was approximately $0.7 million and $0.8 million, respectively. The fee is being recognized ratably over the license term, which ends in 2028.
Additionally, we have elected to use the practical expedient to not adjust the transaction price for the existence of a significant financing component if the timing difference between a customer’s payment and our performance is one year or less.
Note 6. Cryptocurrencies
The following table presents additional information about cryptocurrencies:
|
Beginning balance - January 1, 2021
|
|
$
|
11,626
|
|
|
Revenue recognized from cryptocurrencies mined
|
|
|
108,213
|
|
|
Proceeds from sale of cryptocurrencies
|
|
|
(113
|
)
|
|
Realized gain on sale/exchange of cryptocurrencies
|
|
|
94
|
|
|
Impairment of cryptocurrencies
|
|
|
(17,507
|
)
|
|
Ending balance - September 30, 2021
|
|
$
|
102,313
|
|
Note 7. Investments in Marketable Equity Securities
In September 2017 and February 2018, the Company acquired a minority interest for $9.4 million in Coinsquare Ltd. (“Coinsquare”), which operates a digital crypto currency exchange platform in Canada. The investment resulted in an ownership in Coinsquare by the Company of approximately 11.7%, on a fully diluted basis. In 2020, the Company determined there were indicators that would cause a 100% impairment of the Coinsquare investment, resulting in the Company recording an impairment expense of $9.4 million in 2020. The Company elected under ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities, (“ASU 2016-01”) to account for the Coinsquare investment using the measurement alternative at cost, less any impairment, plus or minus changes resulting from observable price changes.
During the nine months ended September 30, 2021, under agreements generally between Coinsquare, Coinsquare’s shareholders (including Riot) and Mogo Inc. (NASDAQ: MOGO) (“Mogo Agreement”), a digital payments and financial technology company (“Mogo”), Riot sold its 3.4 million common shares of Coinsquare (the “Coinsquare Shares”) in exchange for approximately 3.2 million common shares of Mogo (the “Mogo Shares”) and approximately US $1.8 million in cash.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
During the nine months ended September 30, 2021, the Company recorded a gain on sale/exchange of long-term investments of $26.3 million for the sale of its shares of Coinsquare. Concurrently, in accordance with ASC 321, we recorded the fair value of the MOGO shares, received in the exchange of $24.8 million in investments in marketable equity securities within current assets on our unaudited condensed interim consolidated balance sheets. The fair value was calculated as 3.2 million shares of Mogo common stock multiplied by the fair value of the Mogo shares received. On September 30, 2021, we recorded an unrealized loss on the shares of approximately $11.2 million based on the closing price per share of Mogo common stock on NASDAQ on September 30, 2021 of $4.32. The daily share price is extremely volatile and may be more or less than the amount recorded as of September 30, 2021.
Note 8. Property and Equipment
Property and equipment:
Property and equipment consisted of the following as of September 30, 2021 and December 31, 2020:
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
Buildings and improvements
|
$
|
75,608
|
|
|
$
|
-
|
|
|
Miners and mining equipment
|
|
67,466
|
|
|
|
14,406
|
|
|
Machinery and facility equipment
|
|
7,819
|
|
|
|
-
|
|
|
Office and computer equipment
|
|
239
|
|
|
|
83
|
|
|
Construction in progress
|
|
68,920
|
|
|
|
-
|
|
|
Total cost of property and equipment
|
|
220,052
|
|
|
|
14,489
|
|
|
Less accumulated depreciation
|
|
(19,301
|
)
|
|
|
(4,346
|
)
|
|
Property and equipment, net
|
$
|
200,751
|
|
|
$
|
10,143
|
|
During the nine months ended September 30, 2021, the Company received 18,603 miners related to its current purchase contracts with Bitmain and, as of September 30, 2021, the Company had cumulatively received and deployed a total of 25,646 new Antminer model S17-Pro or newer miners.
During the nine months ended September 30, 2021, the Company paid approximately $103.2 million as deposits, primarily for miners, including $86.9 million paid to Bitmain as refundable deposits for the acquisition of 55,500 Antminer S19j (90 TH/s) miners for an aggregate purchase price of $172.0 million, which are scheduled to be delivered, on a monthly basis, between October 2021 and December 2022, with the remainder of the payments due in advance of deliveries. As of September 30, 2021, the Company reclassified $46.7 million to property and equipment in connection with the receipt of 18,603 miners at the Coinmint Facility or at the Whinstone Facility.
In December 2020, the Company entered into a pilot project with a dual focus of evaluating next-generation immersion technology to increase mining productivity, in addition to evaluating software to reduce energy costs. These technologies have the potential to reduce the Company’s Bitcoin production costs, increase hashrate capacity and significantly extend the life of the Company’s Bitcoin mining ASICs. During June 2021, this pilot project had commenced full operation and the approximate $2.7 million in equipment costs for this project previously not yet operational and included in “Miners and mining equipment” in the table above, commenced being depreciated.
Depreciation and amortization expense related to property and equipment totaled approximately $7.3 million and $1.3 million for the three months ended September 30, 2021 and 2020, respectively. Depreciation and amortization expense related to property and equipment totaled approximately $15.0 million and $2.7 million for the nine months ended September 30, 2021 and 2020, respectively.
Depreciation is computed on the straight-line basis for the periods the assets are in service.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
Construction in progress:
Upon completion of the Whinstone Acquisition, the Company commenced expansion of the Whinstone Facility from its existing 300 MW developed capacity to 750 MW. This expanded Bitcoin mining infrastructure is expected to comprise four new buildings totaling approximately 240,000 square feet, with the capacity to support an estimated 112,000 S19j Antminers based upon current configurations. It is expected that the first portion of this expansion will be completed by Q1 2022 and the balance during Q2 2022. Two of these four buildings are being developed utilizing air-cooling infrastructure, with the optionality to upgrade to immersion-cooling. The other two of these buildings are being developed utilizing immersion-cooling technology, a technique that offers improved cooling performance as compared to air-cooling infrastructure. The expansion of Bitcoin mining infrastructure at Whinstone provides critical capacity for Riot to deploy its future shipments of Bitcoin mining hardware, in addition to providing an opportunity to expand Whinstone’s hosting business for third-party Bitcoin miners.
As of September 30, 2021, the Company had outstanding executed purchase agreements for the purchase of miners from Bitmain for a total of 13,500 new S19j-Pro model miners, scheduled to be delivered through October 2021, and had paid a deposit of 20% of the total purchase price for the acquisition of an additional 42,000 model S19j miners pursuant to a purchase agreement entered into by the Company and Bitmain, dated effective as of April 5, 2021. 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:
|
Agreement Date*
|
|
|
Original Purchase Commitment
|
|
|
Open Purchase Commitment
|
|
|
Deposit Balance
|
|
|
Expected Shipping
|
|
December 18, 2020 (1 of 2)
|
|
$
|
26,308
|
|
$
|
-
|
|
$
|
26,308
|
|
|
Fourth Quarter 2021
|
|
March 11, 2021
|
|
|
7,224
|
|
|
-
|
|
|
7,224
|
|
|
Fourth Quarter 2021
|
|
April 5, 2021**
|
|
|
138,506
|
|
|
82,498
|
|
|
56,008
|
|
|
Fourth Quarter 2021 - Fourth Quarter 2022
|
|
Total
|
|
$
|
172,038
|
|
$
|
82,498
|
|
$
|
89,540
|
|
|
|
* Pursuant to the Company’s agreements with Bitmain, the Company is responsible for all shipping charges incurred in connection with the delivery of the miners.
** The Company paid approximately $29 million as a deposit for the miners to be acquired under the purchase agreement, dated effective as of April 5, 2021, with Bitmain to acquire approximately 42,000 Antminer model S19j Miners, which are scheduled to be shipped in 12 batches of approximately 3,500 miners each, on a monthly basis, between November 2021 and October 2022.
Subsequent to September 30, 2021, in October 2021, the Company entered into a purchase agreement with Bitmain to acquire 9,000 S19j Pro (100 TH/s) miners, for a total purchase price of approximately $54 million, with an anticipated delivery and deployment schedule set for May 2022 through October 2022.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
Note 9. Long-Term Assets
Deposits:
Deposits consisted of the following as of September 30, 2021:
|
Deposits on equipment
|
|
|
|
|
|
Balance at January 1, 2021
|
|
$
|
33,093
|
|
|
Additions
|
|
|
103,158
|
|
|
Reclassification to property and equipment
|
|
|
(46,711
|
)
|
|
Balance at September 30, 2021
|
|
|
89,540
|
|
|
Security deposits
|
|
|
4,876
|
|
|
Deposits at September 30, 2021
|
|
$
|
94,416
|
|
During the nine months ended September 30, 2021, the Company paid approximately $103.2 million as deposits, primarily for miners, and, as of September 30, 2021, had reclassified $46.7 million to property and equipment in connection with the receipt of 18,603 miners at the Coinmint Facility and the Whinstone Facility. See Note 5, “Revenue from Contracts with Customers”.
Security Deposits:
During the nine months ended September 30, 2021, the Company paid approximately $3.1 million in connection with an amended and restated Transmission/Substation Facility Extension Agreement for the construction of the Oncor-owned Delivery System facilities to serve the expansion of the Whinstone Facility. The deposit can be returned in two tranches: 1) upon verification by Oncor that the load demand meets or exceeds 394 MW, approximately $1.3 million can be returned, and 2) upon verification by Oncor that the load demand meets or exceeds 725 MW, the remaining $1.8 million can be returned. As of September 30, 2021, the Company has security deposits totaling $4.9 million, including its ground lease of $1.8 million.
Right of Use Assets:
See Note 11, “Leases”.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
Note 10. Accrued Expenses
As of September 30, 2021 and December 31, 2020, the Company’s accrued expenses consisted of the following:
|
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
Sales and use tax
|
|
$
|
2,437
|
|
|
$
|
791
|
|
|
Construction in progress
|
|
|
1,787
|
|
|
|
-
|
|
|
Payroll and payroll taxes
|
|
|
2,172
|
|
|
|
415
|
|
|
Shipping costs
|
|
|
333
|
|
|
|
-
|
|
|
Professional fees
|
|
|
221
|
|
|
|
120
|
|
|
Other
|
|
|
302
|
|
|
|
256
|
|
|
Total accrued expenses
|
|
$
|
7,252
|
|
|
$
|
1,582
|
|
Note 11. Leases
At September 30, 2021, the Company had operating lease liabilities and right of use assets for its offices and data center hosting facilities, and for a ground lease at the Whinstone Facility that expires in December 2030, inclusive of extension options the Company is reasonably certain will be exercised. At December 31, 2020, the Company did not have any significant operating lease balances.
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, 2021 and December 31, 2020, the right of use assets were $6.7 million and zero, respectively, and the operating lease liabilities were $8.4 million and zero, respectively, in the accompanying unaudited condensed interim consolidated balance sheets related to our ground lease and office leases. The value of the right of use assets exceeds the value of the operating lease liabilities primarily due to certain office and other leases being abandoned. Operating lease right of use assets are included within long-term assets on the condensed interim consolidated balance sheets. Subsequent to September 30, 2021, in November 2021, the Company entered into a lease termination agreement with the landlord of the abandoned leases for approximately $0.9 million. After eliminating the associated operating lease liability of approximately $1.5 million, we anticipate recognizing other income of approximately $0.6 million during the three months ending December 31, 2021.
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.
The components of lease expense for the three and nine months ended September 30, 2021 and 2020 were as follows (in thousands):
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
Lease cost
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Operating lease cost
|
|
$
|
321
|
|
|
$
|
-
|
|
|
$
|
430
|
|
|
$
|
1,240
|
|
|
Variable lease cost(1)
|
|
|
11
|
|
|
|
-
|
|
|
|
19
|
|
|
|
1,040
|
|
|
Operating lease expense
|
|
|
332
|
|
|
|
-
|
|
|
|
449
|
|
|
|
2,280
|
|
|
Short-term lease rent expense
|
|
|
15
|
|
|
|
-
|
|
|
|
15
|
|
|
|
9
|
|
|
Total rent expense
|
|
$
|
347
|
|
|
$
|
-
|
|
|
$
|
464
|
|
|
$
|
2,289
|
|
|
(1)
|
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
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Operating cash flows from operating leases
|
|
$
|
322
|
|
|
$
|
-
|
|
|
$
|
463
|
|
|
$
|
1,207
|
|
|
Right of use assets exchanged for new operating lease liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,387
|
|
|
$
|
-
|
|
|
Weighted-average remaining lease term – operating leases
|
|
|
7.0
|
|
|
|
-
|
|
|
|
7.0
|
|
|
|
-
|
|
|
Weighted-average discount rate – operating leases
|
|
|
7.5
|
%
|
|
|
-
|
|
|
|
7.5
|
%
|
|
|
-
|
|
The following table represents our future minimum operating lease payments as of, and subsequent to, September 30, 2021 under ASC 842 (in thousands):
|
|
|
Ground lease
|
|
|
Office and other leases
|
|
|
Total
|
|
|
2021 (excluding the nine months ended September 30, 2021)
|
|
$
|
229
|
|
|
$
|
151
|
|
|
$
|
380
|
|
|
2022
|
|
|
942
|
|
|
|
836
|
|
|
|
1,778
|
|
|
2023
|
|
|
970
|
|
|
|
839
|
|
|
|
1,809
|
|
|
2024
|
|
|
999
|
|
|
|
218
|
|
|
|
1,217
|
|
|
2025
|
|
|
1,029
|
|
|
|
73
|
|
|
|
1,102
|
|
|
Thereafter
|
|
|
4,433
|
|
|
|
235
|
|
|
|
4,668
|
|
|
Total undiscounted lease payments
|
|
|
8,602
|
|
|
|
2,352
|
|
|
|
10,954
|
|
|
Less present value discount
|
|
|
(2,281
|
)
|
|
|
(294
|
)
|
|
|
(2,575
|
)
|
|
Present value of lease liabilities
|
|
$
|
6,321
|
|
|
$
|
2,058
|
|
|
$
|
8,379
|
|
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 interim consolidated statements of operations.
Note 12. Stockholders’ Equity
At-the-Market Equity Offerings:
2021 ATM Offering
For the period August 31, 2021 to September 30, 2021, in connection with the At-the-Market Sales Agreement between the Company and its sales agent, Cantor Fitzgerald & Co., B. Riley FBR, Inc., BTIG, LLC, Compass Point Research & Trading, LLC and Roth Capital Partners, LLC (the “Sales Agents”) the Company received gross proceeds of approximately $35.7 million ($34.8 million, net of $0.9 million in commissions and expenses) from the sale of 1,227,991 shares of common stock, with an average fair value of $29.07 per share, in the 2021 ATM Offering.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
December 2020 ATM Offering
During January 2021, in connection with the Second Amendment to the At-the-Market Sales Agreement between the Company and its sales agent, H.C. Wainwright, the Company received gross proceeds of approximately $84.8 million ($82.7 million, net of $2.1 million in expenses) from the sale of 4,433,468 shares of common stock, with an average fair value of $19.13 per share, in the December 2020 ATM Offering. With the sale and issuance of these shares, all $200 million in shares of the Company’s common stock registered under the December 2020 Registration Statement had been issued and the Company completed the December 2020 ATM Offering. Under the terms of the December 2020 ATM Offering, the Company only issued shares of its common stock.
Common Stock:
During the nine months ended September 30, 2021, the Company issued 11,800,000 shares of its common stock in connection with its acquisition of Whinstone. See Note 4, “Acquisitions”.
During the nine months ended September 30, 2021, 316,920 shares of common stock were issued to members of the Company’s board of directors, officers, employees and advisors of the Company in settlement of an equal number of fully vested restricted stock units awarded to such individuals by the Company pursuant to grants made under the Company’s 2019 Equity Plan, as amended (the “2019 Equity Plan”). The Company withheld 56,649 of these shares, at a fair value of approximately $1.8 million, to cover the withholding taxes related to the settlement of these vested restricted stock units, as permitted by the 2019 Equity Plan.
During the nine months ended September 30, 2021, the Company issued 415,657 shares of its common stock in connection with the exercise of 415,657 common stock warrants issued to investors in connection with the Company’s January 2019 private placement transaction, for net proceeds of approximately $0.8 million.
During the nine months ended September 30, 2021, the Company issued 543,686 shares of its common stock in connection with the cashless exercise of warrants to purchase 1,257,235 shares of common stock, which were issued to investors in connection with private placement transactions in December 2017.
During the nine months ended September 30, 2021, 2,000 shares of the Company’s Series B preferred stock were converted into 2,000 shares of its common stock, leaving 2,199 shares outstanding.
Note 13. 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 nine months ended September 30, 2021 and 2020 were primarily attributable to selling, general and administrative expenses, which are included in the accompanying unaudited condensed interim consolidated statements of operations. During the three and nine months ended September 30, 2021, $0.6 million of stock-based compensation expense was recorded in cost of revenues, data center hosting. All stock-based compensation expense recognized during 2020 was recognized in selling, general and administrative expenses.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
The Company recognized stock-based compensation expense during the three and nine months ended September 30, 2021 and 2020 as follows:
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Time-based restricted stock awards
|
|
$
|
1,518
|
|
|
$
|
467
|
|
|
$
|
3,423
|
|
|
$
|
2,848
|
|
|
Performance-based restricted stock awards
|
|
|
34,505
|
|
|
|
-
|
|
|
|
34,505
|
|
|
|
-
|
|
|
Total stock-based compensation
|
|
$
|
36,023
|
|
|
$
|
467
|
|
|
$
|
37,928
|
|
|
$
|
2,848
|
|
Restricted Common Stock Awards:
During the nine months ended September 30, 2021, the Company granted performance-based and time-based restricted stock units (RSUs) to its directors, employees and advisors.
Performance-based RSUs
On August 12, 2021, the Compensation Committee of the Board of Directors of the Company approved a new performance-based restricted stock unit performance plan (the “Performance RSU Plan”) for all executive officers and eligible employees of the Company and its consolidated subsidiaries. In connection with the Performance RSU Plan, the Compensation Committee approved a form of performance-based restricted stock unit award agreement under the 2019 Equity Plan in relation to granting Performance RSUs. The Performance RSUs vest upon the successful completion of specified milestones related to added infrastructure capacity and also adjusted Earnings Before Income Taxes, Depreciation and Amortization (“EBITDA”) targets over a three-year performance period beginning in 2021 and ending on December 31, 2023. The value of the RSUs awarded is established as the fair market value of the Company’s common stock at the time of the grant. The Company recognizes compensation cost when achievement of the milestones and targets are probable, and recognizes the cost over the performance period. The Performance RSUs are settled in shares of the Company’s common stock upon vesting.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
A summary of the Company’s unvested performance-based restricted common stock units for the nine months ended September 30, 2021 is presented here:
|
|
|
|
Number of Shares
|
|
|
Weighted Average Grant-Date
Fair Value
|
|
|
Unvested at January 1, 2021
|
|
|
|
-
|
|
|
$
|
-
|
|
|
Granted
|
|
|
|
3,925,000
|
|
|
$
|
36.83
|
|
|
Vested
|
|
|
|
(319,027)
|
|
|
$
|
36.83
|
|
|
Unvested at September 30, 2021
|
|
|
|
3,605,973
|
|
|
$
|
36.83
|
|
During the nine months ended September 30, 2021, the Company awarded 3,925,000 performance-based restricted shares of common stock under the 2019 Equity Plan to employees, which are generally eligible to vest upon the successful completion of specified milestones related to added infrastructure capacity and also adjusted EBITDA targets over a three-year performance period beginning in 2021 and ending on December 31, 2023.
As of September 30, 2021, a total of 319,027 Performance RSU Awards for officers and employees were determined by the Compensation Committee to have vested for the successful completion of specified milestones.
The value of performance-based restricted common stock grants is measured based on their fair market value on the date of grant and amortized over their respective estimated implicit service periods. During the nine months ended September 30, 2021, the fair value of awards granted totaled $144.6 million and as of September 30, 2021, there was approximately $110.1 million of total unrecognized compensation cost related to restricted common stock awards, which is expected to be recognized over a remaining weighted-average vesting period of approximately 8.4 months.
Time-based RSUs
A summary of the Company’s unvested time-based restricted common stock units for the nine months ended September 30, 2021 is presented here:
|
|
|
|
Number of Shares
|
|
|
Weighted Average Grant-Date
Fair Value
|
|
|
Unvested at January 1, 2021
|
|
|
|
633,305
|
|
|
$
|
1.27
|
|
|
Vested
|
|
|
|
(188,849)
|
|
|
$
|
14.44
|
|
|
Granted
|
|
|
|
173,737
|
|
|
$
|
33.33
|
|
|
Forfeited
|
|
|
|
(150)
|
|
|
$
|
44.64
|
|
|
Unvested at September 30, 2021
|
|
|
|
618,043
|
|
|
$
|
6.31
|
|
During the nine months ended September 30, 2021, the Company awarded 173,737 restricted shares of time-based common stock under the 2019 Equity Plan to directors, employees and advisors, which are generally eligible to vest over a one-year period.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
The value of time-based restricted common stock grants is measured based on their fair market value on the date of grant and amortized over their respective vesting periods. During the nine months ended September 30, 2021, the fair value of awards granted totaled $5.8 million and as of September 30, 2021, there was approximately $2.6 million of total unrecognized compensation cost related to unvested time-based restricted common stock rights, which is expected to be recognized over a remaining weighted-average vesting period of approximately 5 months.
Other Common Stock Purchase Warrants:
During the three months ended September 30, 2021, 63,000 warrants were issued to XMS as partial payment for its advisory services in connection with the Whinstone Acquisition. The warrant entitles XMS to purchase from the Company up to 63,000 shares of the Company’s common stock, no par value per share, at a purchase price of $48.37 per share at any time through August 12, 2026. All warrants issued to prior investors in connection with previously disclosed private placement transactions in 2019 and 2017, had either been exercised or forfeited. The following is a summary of outstanding warrants for the nine months ended September 30, 2021:
|
|
|
|
Shares
Underlying
Options/Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
Weighted
Average
Remaining
Contractual Term (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
|
Outstanding and exercisable at January 1, 2021
|
|
|
2,061,770
|
|
|
$
|
32.33
|
|
|
|
1.1
|
|
|
$
|
6,256
|
|
|
Granted
|
|
|
63,000
|
|
|
$
|
48.37
|
|
|
|
4.9
|
|
|
|
-
|
|
|
Exercised
|
|
|
(1,672,892
|
)
|
|
$
|
1.94
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
|
|
|
(388,878)
|
|
|
$
|
40.00
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding and exercisable at September 30, 2021
|
|
|
63,000
|
|
|
$
|
48.37
|
|
|
|
4.9
|
|
|
$
|
-
|
|
Note 14. 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 the Acquisition Date of May 26, 2021, and September 30, 2021:
|
|
|
Fair value measured at May 26, 2021
|
|
|
|
|
Total carrying value at
May 26, 2021
|
|
|
Quoted prices in active
markets
(Level 1)
|
|
|
Significant other
observable inputs
(Level 2)
|
|
|
Significant
unobservable inputs
(Level 3)
|
|
|
Derivative asset
|
|
$
|
13,967
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,967
|
|
|
Contingent consideration liability
|
|
$
|
82,953
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
82,953
|
|
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
|
|
|
Fair value measured at September 30, 2021
|
|
|
|
|
Total carrying value at
September 30, 2021
|
|
|
Quoted prices in active
markets
(Level 1)
|
|
|
Significant other
observable inputs
(Level 2)
|
|
|
Significant
unobservable inputs
(Level 3)
|
|
|
Derivative asset
|
|
$
|
37,773
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
37,773
|
|
|
Contingent consideration liability
|
|
$
|
83,397
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
83,397
|
|
Level 3 Assets
Power Supply Agreement
During the nine months ended September 30, 2021, the Company recorded a derivative asset related to its Power Supply Agreement. The Power Supply Agreement was classified as a derivative asset and measured at fair value on the date of the Company’s acquisition of Whinstone, with changes in fair value recognized in change in fair value of derivative asset in operating income or loss on the accompanying unaudited condensed interim consolidated statements of operations. The contract was not designated as a hedging instrument. Prior to the Whinstone Acquisition, the Company did not have any derivative contracts. The estimated fair value of the Company’s derivate asset is classified in Level 3 of the fair value hierarchy due to the significant unobservable inputs utilized in the valuation. Specifically, our discounted cash flow estimation models contain quoted commodity exchange spot and forward prices and are adjusted for basis spreads for load zone-to-hub differentials through the term of the Power Supply Agreement, which ends in December 2030. The discount rate utilized of approximately 21% includes observable market inputs, but also includes unobservable inputs based on qualitative judgment related to company-specific risk factors.
The terms of the Power Supply Agreement require margin-based collateral, calculated as exposure resulting from fluctuations in the market cost rate of electricity versus the fixed price stated in the contract. The margin-based collateral requirement to the Company is zero as of September 30, 2021.
Level 3 Liabilities
Business Combination Contingent Consideration
The Company recorded a Level 3 financial liability during the nine months ended September 30, 2021, relating to the contingent consideration arrangement arising from the acquisition of Whinstone. Contingent consideration represents an obligation of the Company to transfer cash to the Seller when Whinstone realizes or receives a benefit from utilization of certain defined power credits. See Note 4, “Acquisitions”. The Company estimated the fair value of the contingent consideration using a discounted cash flow analysis, which includes estimates of both the timing and amounts of potential future power credits. These estimates were determined using the Company’s historical consumption quantities and patterns combined with management’s expectations of its future consumption requirements, which require significant judgment and depend on various factors outside the Company’s control, such as construction delays. The discount rate of approximately 2.5% includes observable market inputs, such as TXU’s parent company’s Standard & Poor’s credit rating of BB, but also includes unobservable inputs such as interest rate spreads, which were estimated based on qualitative judgment related to company-specific risk factors. Specifically, due to the power credits being subordinated obligations for TXU’s parent, we used one credit rating lower than BB in our yield curve to estimate a reasonable interest rate spread to determine the cost of debt input. The significant assumptions used to estimate fair value of the derivative contract include a discount rate of 21%, which reflected the nature of the contract as it relates to the risk and uncertainty of the estimated future mark-to-market adjustments, forward price curves of the power supply, broker/dealer quotes and other similar data obtained from quoted market prices or independent pricing vendors. Although these estimates are based on management’s best knowledge of current events, the estimates could change significantly from period to period. Actual results that differ from the assumptions used and any changes to the significant assumptions and unobservable inputs used could have a material impact on future results of operations.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
Changes in Level 3 assets and liabilities measured at fair value on a recurring basis
Unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category. Unrealized gains and losses associated with the asset within the Level 3 category includes changes in fair value that were attributable to unobservable (e.g., changes in unobservable long-dated volatilities) inputs.
The following table presents the changes in the estimated fair value of the derivative asset measured using significant unobservable inputs (Level 3) for the nine months ended September 30, 2021:
|
|
|
Derivative Asset
|
|
|
Balance as of January 1, 2021
|
|
$
|
-
|
|
|
Acquisition of Whinstone
|
|
|
13,967
|
|
|
Change in fair value
|
|
|
23,806
|
|
|
Balance as of September 30, 2021
|
|
$
|
37,773
|
|
For the nine months ended September 30, 2021 there was a change of approximately $23.8 million in Level 3 assets measured at fair value. Additionally, during the nine months ended September 30, 2021, power sales back to ERCOT through its demand response programs of $3.7 million were recorded in change in fair value of derivative asset in the condensed interim consolidated statements of operations. There were no Level 3 assets for the nine months ended September 30, 2020.
The following table presents the changes in the estimated fair value of our liability for contingent consideration measured using significant unobservable inputs (Level 3) for the nine months ended September 30, 2021:
|
|
|
Contingent
Consideration Liability
|
|
|
Balance as of January 1, 2021
|
|
$
|
-
|
|
|
Acquisition of Whinstone
|
|
|
82,953
|
|
|
Change in fair value
|
|
|
444
|
|
|
Balance as of September 30, 2021
|
|
$
|
83,397
|
|
For the nine months ended September 30, 2021 the change in Level 3 liabilities measured at fair value was $0.4 million. There were no Level 3 liabilities for the nine months ended September 30, 2020. Our estimated liability for contingent consideration represents potential payments of additional consideration for the Whinstone Acquisition, payable if Whinstone realizes or receives a benefit from utilization of certain defined power credits. Changes in the fair value of contingent consideration are recorded in the condensed interim 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 period 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 goodwill, intangible assets, operating lease right of use assets, and property, plant and equipment, are measured at fair value when there is an indication of impairment and the carrying amount exceeds the asset’s projected undiscounted cash flows. These assets are recorded at fair value only when an impairment charge is recognized. Further details regarding our regular impairment reviews appear in Note 3, “Summary of Significant Accounting Policies”.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
Note 15. Commitments and Contingencies
Commitments:
Operating Leases:
The Company leases its primary office locations and data center hosting facilities, as well as a ground lease, under noncancelable lease agreements that expire on varying dates through 2030. See Note 11, “Leases”.
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 water from a nearby lake to be used by the Company for commercial purposes. We use the water for evaporative cooling in our data center facility. The initial term of the agreement runs through December 2027 and requires annual payments of approximately $1.0 million.
Contingencies:
Contingent Payments Related to Business Acquisitions:
In connection with the Whinstone Acquisition, the Company is required to make contingent payments subject to the acquired business realizing or receiving a benefit from utilization of certain defined power credits resulting from the February weather event in Texas, subsequent to the Acquisition Date. See Note 4, “Acquisitions”.
The fair value of the remaining aggregate contingent payments at September 30, 2021 is included in long-term liabilities in the unaudited interim condensed consolidated balance sheet.
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 such proceedings. 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 in an effort to protect the Company from such claims. In terms of any matters where there is no insurance coverage 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. On the basis of current information, the Company does not believe there is a reasonable possibility that, other than with regard to the Class Action described below, any material loss, if any, will result from any claims, lawsuits and proceedings to which the Company is subject to either individually, or in the aggregate.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
Shareholder Class Action Suit:
On February 17, 2018, Creighton Takata filed an action asserting putative class action claims on behalf of the Company’s stockholders in the United District Court for the District of New Jersey, Takata v. Riot Blockchain Inc., et al., Case No. 3: 18-cv-02293. The complaint asserts violations of federal securities laws under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 on behalf of a putative class of stockholders that purchased stock from November 13, 2017 through February 15, 2018. The complaint alleges that the Company and certain of its officers and directors made, caused to be made, or failed to correct false and/or misleading statements in press releases and public filings regarding its business plan in connection with its cryptocurrency business. The complaint requests damages in unspecified amounts, costs and fees of bringing the action, and other unspecified relief.
On April 18, 2018, Joseph J. Klapper, Jr., filed a complaint against Riot Blockchain, Inc., and certain of its officers and directors in the United District Court for the District of New Jersey (Klapper v. Riot Blockchain Inc., et al., Case No. 3: 18-cv-8031). The complaint contained substantially similar allegations and the same claims as those filed by Mr. Takata, and requests damages in unspecified amounts, costs and fees of bringing the action, and other unspecified relief. On November 6, 2018, the court in the Takata action issued an order consolidating Takata with Klapper into a single putative class action. The court also appointed Dr. Golovac as Lead Plaintiff and Motely Rice as Lead Counsel of the consolidated class action.
Lead Plaintiff filed a consolidated complaint on January 15, 2019. Defendants filed motions to dismiss on March 18, 2019. In lieu of opposing defendants’ motions to dismiss, Lead Plaintiff filed another amended complaint on May 9, 2019. Defendants filed multiple motions to dismiss the amended complaint starting on September 3, 2019.
On April 30, 2020, the court granted the motions to dismiss, which resulted in the dismissal of all claims without prejudice. On December 24, 2020, Lead Plaintiff filed another amended complaint. Defendants filed multiple motions to dismiss the amended complaint starting on February 8, 2021, which have been fully briefed. Because this litigation is still at this early stage, we cannot reasonably estimate the likelihood of an unfavorable outcome or the magnitude of such an outcome, if any.
Shareholder Derivative Cases:
On April 5, 2018, Michael Jackson filed a shareholder derivative complaint on behalf of the Company in the Supreme Court of the State of New York, County of Nassau, against certain of the Company’s officers and directors, as well as against an investor (Jackson v. Riot Blockchain, Inc., et al., Case No. 604520/18). The complaint contains similar allegations to those contained in the shareholder class action complaints and seeks recovery for alleged breaches of fiduciary duty, unjust enrichment, waste of corporate assets, abuse of control and gross mismanagement. The complaint seeks unspecified monetary damages and corporate governance changes. At the last preliminary conference, the court adjourned the conference until March 15, 2022 in lieu of staying the action. Defendants do not anticipate any other activity on this case until the next preliminary conference.
On May 22, 2018, two additional shareholder derivative complaints were filed on behalf of the Company in the Eighth Judicial District Court of the State of Nevada in and for the County of Clark (Kish v. O’Rourke, et al., Case No. A-18-774890-B & Gaft v. O’Rourke, et al., Case No. A-18-774896-8). The two complaints make identical allegations, which are similar to the allegations contained in the shareholder class action complaints. The shareholder derivative plaintiffs also seek recovery for alleged breaches of fiduciary duty, unjust enrichment, waste of corporate assets, and aiding abetting a breach of fiduciary duty. The complaints seek unspecific monetary damages and corporate governance changes.
On September 24, 2018, the court entered an order consolidating the Gaft and Kish actions, which is now styled as In re Riot BlockChain, Inc. Shareholder Derivative Litigation, Case No. A-18-774890-B. The plaintiffs filed a consolidated complaint on March 15, 2019. The consolidated action has been temporarily stayed until the resolution of the motion(s) to dismiss in the securities class action pending in the United District Court for the District of New Jersey.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
On October 9, 2018, another shareholder derivative complaint was filed on behalf of the Company in the United District Court for the Eastern District of New York (Rotkowitz v. O’Rourke, et al., Case No. 2:18-cv-05632). As with the other shareholder derivative actions, the shareholder plaintiff alleges breach of fiduciary duty, waste of corporate assets, and unjust enrichment against certain of the Company’s officers, directors, and an investor. The complaint’s allegations are substantially similar to those made in the other securities class action and shareholder derivative complaints filed in 2018. The complaint seeks unspecific monetary damages and corporate governance changes. The parties filed a motion with the court to temporarily stay this action until the resolution of the motion(s) to dismiss in the securities class action pending in the United District Court for the District of New Jersey. In response, the court dismissed the action without prejudice with leave to refile a complaint following the resolution of the motion(s) to dismiss in the securities class action pending in the United District Court for the District of New Jersey.
On October 22, 2018, another shareholder derivative complaint was filed on behalf of the Company in the United District Court for the Southern District of New York (Finitz v. O’Rourke, et al., Case No. 1:18-cv-09640). The shareholder plaintiffs allege breach of fiduciary duty, waste of corporate assets, and unjust enrichment against certain of the Company’s officers, directors, and an investor. The complaint’s allegations are substantially similar to those made in the other securities class action and shareholder derivative complaints filed in 2018. The complaint seeks unspecific monetary damages and corporate governance changes. Upon the parties’ stipulation, the court issued an order temporarily staying this action until the resolution of the motion(s) to dismiss in the securities class action pending in the United District Court for the District of New Jersey.
On December 13, 2018, another shareholder derivative complaint was filed on behalf of the Company in the United District Court for the Northern District of New York (Monts v. O’Rourke, et al., Case No. 1:18-cv-01443). The shareholder plaintiffs allege claims for violation of Section 14(a) of the Securities Exchange Act of 1934, breach of fiduciary duties, unjust enrichment, waste of corporate assets, and aiding and abetting against certain of the Company’s officers, directors, and an investor. The complaint’s allegations are substantially similar to those made in the other securities class action and shareholder derivative complaints filed in 2018. The complaint seeks unspecific monetary damages and corporate governance changes. Upon the parties’ stipulation, the court issued an order temporarily staying this action until the resolution of the motion(s) to dismiss in the securities class action pending in the United District Court for the District of New Jersey.
Defendants intend to vigorously contest plaintiffs’ allegations in the shareholder derivative actions and plaintiffs’ right to bring the action in the name of Riot Blockchain. But because this litigation is still at this early stage, we cannot reasonably estimate the likelihood of an unfavorable outcome or the magnitude of such an outcome, if any.
Kashwise Demand:
On February 18, 2020, the Company received a demand letter from Kashwise Global Funding, Inc. (“Kashwise”) for the payment of fees pursuant to an alleged arrangement between the Company and Kashwise in connection with the January 2019 private exempt offering of the Company’s securities to a group of accredited investors (the “Kashwise Demand”). The Company timely responded to the Kashwise Demand; however, on April 13, 2020, Kashwise Global Funding Solutions, Inc. filed suit against the Company in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida (the “Kashwise Suit”) alleging substantially similar claims as in the Kashwise Demand. The Company removed the Kashwise Suit to Federal District Court in and for the Southern District of Florida and vigorously disputed the allegations made in the Kashwise Suit. On August 12, 2021, the Court entered an order granting the Company’s motion for summary judgment on all claims in the Kashwise Suit, and the next day it entered Final Judgment in favor of the Company.
Note 16. Segment Information
The Company applies ASC 280, Segment Reporting, in determining its reportable segments. The Company has two reportable segments: Cryptocurrency Mining and Data Center Hosting. The guidance requires that segment disclosures present the measure(s) used by the Chief Operating Decision Maker (“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 both reporting segments to assess the performance of the business of our reportable operating segments.
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
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 Cryptocurrency Mining segment generates revenue from the cryptocurrency 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 high performance computing facility in Rockdale, Texas.
All revenues are from external customers and no single customer or related group of customers contributed 10% or more of the Company's total revenue during the three and nine months ended September 30, 2021 and 2020.
Through September 30, 2021, approximately 90% of the Company’s cryptocurrency mining revenue was generated from the Coinmint Facility in New York, and 100% of the Company’s data center hosting revenue was generated from the Whinstone Facility in Rockdale, Texas.
The following table details revenue and cost of revenues for the Company's reportable segments for the three and nine months ended September 30, 2021 and 2020, and reconciles to net income (loss) on the condensed interim consolidated statements of operations:
Riot Blockchain, Inc. and Subsidiaries
Notes to the Condensed Interim Consolidated Financial Statements
(Unaudited)
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Reportable segment revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue, net - cryptocurrency mining
|
|
$
|
53,590
|
|
|
$
|
2,437
|
|
|
$
|
108,213
|
|
|
$
|
6,717
|
|
|
Revenue, net - data center hosting
|
|
|
11,193
|
|
|
|
-
|
|
|
|
14,067
|
|
|
|
-
|
|
|
Other revenue
|
|
|
25
|
|
|
|
25
|
|
|
|
73
|
|
|
|
73
|
|
|
Total segment and consolidated revenue
|
|
|
64,808
|
|
|
|
2,462
|
|
|
|
122,353
|
|
|
|
6,790
|
|
|
Reportable segment cost of revenue (exclusive of depreciation and amortization shown below):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues - cryptocurrency mining
|
|
|
13,034
|
|
|
|
1,302
|
|
|
|
29,893
|
|
|
|
4,149
|
|
|
Cost of revenues - data center hosting
|
|
|
12,581
|
|
|
|
-
|
|
|
|
16,317
|
|
|
|
-
|
|
|
Total segment and consolidated cost of revenues (exclusive of depreciation and amortization shown below)
|
|
|
25,615
|
|
|
|
1,302
|
|
|
|
46,210
|
|
|
|
4,149
|
|
|
Reconciling Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related costs
|
|
|
(552
|
)
|
|
|
-
|
|
|
|
(18,894
|
)
|
|
|
-
|
|
|
Selling, general and administrative
|
|
|
(40,307
|
)
|
|
|
(2,000
|
)
|
|
|
(47,971
|
)
|
|
|
(7,964
|
)
|
|
Depreciation and amortization
|
|
|
(12,207
|
)
|
|
|
(1,267
|
)
|
|
|
(20,791
|
)
|
|
|
(2,761
|
)
|
|
Change in fair value of derivative asset
|
|
|
9,920
|
|
|
|
-
|
|
|
|
27,456
|
|
|
|
-
|
|
|
Change in fair value of contingent consideration
|
|
|
(259
|
)
|
|
|
-
|
|
|
|
(444
|
)
|
|
|
-
|
|
|
Impairment of long-term investment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,413
|
)
|
|
Impairment of cryptocurrencies
|
|
|
-
|
|
|
|
-
|
|
|
|
(17,507
|
)
|
|
|
(989
|
)
|
|
Reversal of registration rights penalty
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,358
|
|
|
Gain (loss) on sale of equipment
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
31
|
|
|
Interest income
|
|
|
40
|
|
|
|
12
|
|
|
|
295
|
|
|
|
27
|
|
|
Other income (expense)
|
|
|
(85
|
)
|
|
|
(2
|
)
|
|
|
1,425
|
|
|
|
(5
|
)
|
|
Realized gain on sale/exchange of long-term investment
|
|
|
-
|
|
|
|
-
|
|
|
|
26,260
|
|
|
|
-
|
|
|
Realized gain on sale/exchange of cryptocurrencies
|
|
|
65
|
|
|
|
385
|
|
|
|
94
|
|
|
|
491
|
|
|
Unrealized loss on marketable equity securities
|
|
|
(11,151
|
)
|
|
|
-
|
|
|
|
(10,812
|
)
|
|
|
-
|
|
|
Deferred income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,730
|
)
|
|
|
-
|
|
|
Net income (loss)
|
|
$
|
(15,343
|
)
|
|
$
|
(1,717
|
)
|
|
$
|
11,524
|
|
|
$
|
(16,584
|
)
|
Note 17. Subsequent Events
Common Stock
Subsequent to September 30, 2021, the Company’s shareholders approved the second amendment to its 2019 Equity Plan, which increases the number of shares of the Company’s common stock reserved for issuance by 4,400,000 shares.
ATM Activity
Subsequent to September 30, 2021, in connection with the Company’s 2021 ATM Offering, the Company received gross proceeds of approximately $564.3 million from the sale of 18.7 million shares of common stock, which completed the 2021 ATM Offering.
Restricted Stock
Subsequent to September 30, 2021, the Company granted 9,131 time-based restricted stock units with a fair value of approximately $0.3 million and 118,805 performance-based restricted stock units with a fair value of approximately $3.7 million.
Subsequent to September 30, 2021, 69,948 shares of common stock were issued to officers of the Company in settlement of an equal number of fully vested restricted stock units awarded to such individuals by the Company pursuant to grants made under the Company’s 2019 Equity Plan. The Company withheld 20,984 of these shares at a fair value of approximately $0.5 million, to cover the withholding taxes related to the settlement of these vested restricted stock units.
In October 2021, the Company entered into an agreement to issue 180,000 restricted share rights to XMS for its continued advisory services on potential strategic matters. These restricted share rights vest quarterly in equal tranches over three years, beginning in October 2021.
Miners
In October 2021, the Company entered into a purchase agreement with Bitmain to acquire 9,000 S19j Pro (100 TH/s) miners, for a total purchase price of approximately $54 million, with an anticipated delivery and deployment schedule set for May 2022 through October 2022.
Leases
In November 2021, the Company entered into a lease termination agreement with the landlord of certain Whinstone abandoned leases for approximately $0.9 million. After eliminating the associated operating lease liability of approximately $1.5 million, we anticipate recognizing other income of approximately $0.6 million during the three months ending December 31, 2021.