Riot Platforms, Inc. (formerly Riot Blockchain, Inc.) — Q3 2022 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2022. Riot is a vertically integrated Bitcoin mining company with three operating segments: Bitcoin Mining, Data Center Hosting, and Electrical Products and Engineering. Its principal facility is the 700-megawatt Rockdale, Texas facility; the company also began developing the approximately one-gigawatt Corsicana, Texas facility.
Financial performance and key metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total revenue | $46.3 million | $64.8 million | $199.0 million | $122.4 million |
| Mining revenue | $22.1 million | $53.6 million | $126.2 million | $108.2 million |
| Data Center Hosting revenue | $8.4 million | $11.2 million | $27.9 million | $14.1 million |
| Engineering revenue | $15.8 million | — | $44.9 million | — |
| Net income (loss) | $(36.6) million | $(15.3) million | $(353.8) million | $11.5 million |
| Operating income (loss) | $(40.0) million | $(4.1) million | $(354.6) million | $(1.9) million |
| Adjusted EBITDA | $0.2 million | $37.5 million | $(53.3) million | $52.3 million |
| Net cash used in operating activities | Not separately provided | Not separately provided | $0.7 million | $60.9 million |
Q3 revenue declined approximately 29% year over year, primarily because Bitcoin mined decreased to 1,042 from 1,292 and the average Bitcoin value fell to approximately $21,184 from $41,837. Nine-month revenue increased approximately 63%, reflecting higher Bitcoin production, a full nine months of Data Center Hosting revenue compared with four months in the prior-year period, and the addition of Engineering revenue.
Q3 net loss margin was approximately negative 79%; nine-month net loss margin was approximately negative 178%. Mining cost of revenue represented 66.5% of Mining revenue in Q3 and 41.0% for the nine-month period, before power curtailment credits. After allocated power curtailment credits, Mining gross contribution margins were 61.2% in Q3 and 65.4% for nine months. Data Center Hosting contribution margin after power curtailment credits was 13.3% in Q3 and negative 12.0% for nine months.
- Cash and cash equivalents: $255.0 million at September 30, 2022, down from $312.3 million at December 31, 2021.
- Working capital: approximately $369.8 million.
- Bitcoin holdings: 6,766 Bitcoin with a carrying value of $125.2 million; estimated fair value at September 30 was approximately $131.5 million based on a Bitcoin price of approximately $19,432.
- Total assets: $1.454 billion; stockholders’ equity: $1.299 billion; accumulated deficit: $591.6 million.
- Total liabilities: $154.3 million. Management states that the company has no long-term debt, although it had approximately $22.2 million of operating lease liabilities and $40.0 million of contingent consideration liability at September 30.
- Cash flow from investing was negative $329.4 million, including $194.9 million of equipment deposits and $129.7 million of property and equipment purchases.
- Cash flow from financing was $272.8 million, primarily from $298.4 million of net proceeds under the 2022 at-the-market equity offering.
Material changes versus the prior comparable period
- Mining revenue decreased materially in Q3 because of lower Bitcoin prices and production; nine-month Mining revenue nevertheless increased 17% because production rose to 3,842 Bitcoin from 2,458.
- Riot deployed 55,728 miners at September 30, 2022, compared with 30,907 at January 1, 2022. The company reported approximately 5.6 EH/s of hash-rate capacity and expects approximately 115,450 miners and 12.5 EH/s by the first quarter of 2023, subject to delivery and deployment risks.
- Riot terminated its Coinmint co-location arrangement effective July 8, 2022 and moved its remaining miners to Rockdale, seeking to reduce third-party hosting costs.
- Power curtailment credits increased to $13.1 million in Q3 and $21.3 million for nine months, compared with $2.5 million and $3.7 million, respectively, in the prior periods. These credits resulted from selling power back into the ERCOT market while temporarily reducing mining activity.
- The company recorded $132.1 million of Bitcoin impairment and a $335.6 million non-cash goodwill impairment for the nine months. The goodwill impairment fully eliminated goodwill related to the Whinstone and ESS Metron acquisitions.
- Property and equipment, net, increased to $650.2 million from $276.5 million at December 31, 2021, primarily due to miner deployment and facility expansion.
- Shares outstanding increased to approximately 167.3 million from 116.7 million at December 31, 2021, primarily due to the ATM offering and other equity issuances.
- The company revised previously issued financial statements to correct a $13.5 million acquisition-accounting classification error between property and equipment and goodwill. Management concluded the error was immaterial to prior periods.
Guidance, outlook, risks, contingencies, and unusual items
Riot expects the first phase of the Corsicana facility to cost approximately $333 million, with operations targeted to begin in the fourth quarter of 2023 after expected substation completion in summer 2023. The company had incurred approximately $30 million through September 30, 2022 and expected additional spending of approximately $74.0 million during the remainder of 2022, $223.9 million during 2023, and $9.5 million in the first quarter of 2024.
Management believes existing cash and Bitcoin holdings are sufficient to fund operating and capital requirements for at least one year from issuance of the financial statements. However, management also states that additional equity or debt financing may be required. The company had approximately $44.9 million payable to Bitmain for miners scheduled for delivery through December 2022, and substantial additional capital commitments for Corsicana development.
- Principal operating risks include Bitcoin price volatility, network difficulty and hash-rate growth, electricity availability and pricing, energy regulation, cybersecurity, supply-chain delays, equipment delivery, facility concentration, environmental and climate-related regulation, and competition.
- Bitcoin accounting creates substantial earnings volatility because impairment charges establish a new cost basis and cannot be reversed under the company’s accounting policy.
- Riot disclosed material weaknesses in internal control over financial reporting involving access controls, IT change management, third-party data, valuation assumptions for acquired intangible assets, and Whinstone’s control environment. Management is pursuing remediation but stated the weaknesses will not be remediated until controls operate effectively for a sufficient period and can be tested.
- Riot filed a Delaware action against Northern Data AG regarding alleged undisclosed Whinstone liabilities exceeding $100 million. Northern Data counterclaimed regarding approximately $40 million of allegedly unpaid energy credits and other matters.
- GMO Gamecenter and GMO Internet seek more than $50 million from Whinstone in a customer dispute. Whinstone denies the allegations and asserted counterclaims seeking more than $25 million.
- Legacy shareholder class and derivative actions remain pending; the company stated that potential loss cannot currently be reasonably estimated.
- A related-party initiative involving approximately $0.1 million of deposits for temporary housing at Rockdale is under review for accounting and regulatory reporting implications.
Important facts for investors to verify
- Whether Bitcoin prices, network difficulty, power costs, and ERCOT curtailment credits support positive cash margins as the mining fleet expands.
- The timing, funding, and total cost of the Corsicana facility and the expected deployment of contracted miners.
- The extent of future equity issuance, dilution, or debt financing after the $298.4 million of net ATM proceeds raised through September 30, 2022.
- The carrying value, liquidity strategy, and impairment exposure of the company’s Bitcoin holdings.
- Progress in remediating the disclosed material weaknesses in internal control over financial reporting.
- The financial and operational impact of the Northern Data and GMO disputes, as well as the legacy shareholder litigation.
- The sustainability of Data Center Hosting and Engineering margins, particularly given the negative nine-month Data Center Hosting contribution after power credits.