Riot Platforms, Inc. (formerly Riot Blockchain, Inc.) — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The company focused on cryptocurrency mining, primarily bitcoin. Financial statements are unaudited.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $1.94 million | $2.47 million | $4.33 million | $3.90 million |
| Operating loss | $11.97 million | $1.37 million | $16.38 million | $4.59 million |
| Net loss attributable to Riot | $10.59 million | $1.28 million | $14.87 million | $14.81 million |
| Basic and diluted loss per share | $0.31 | $0.08 | $0.47 | $0.97 |
- Mining revenue was $1.92 million in Q2 and $4.28 million for the first half; license-fee revenue was $24,000 and $48,000, respectively.
- Cost of revenue, excluding separately reported depreciation and amortization, was $1.44 million in Q2 and $2.85 million for the first half. This implies gross margin before depreciation and amortization of approximately 26% and 34%, respectively.
- Q2 costs included a $9.41 million impairment of the Coinsquare investment. First-half costs also included a $989,000 cryptocurrency impairment; a $1.36 million registration-rights penalty reversal partly offset expenses.
- At June 30, cash and equivalents were $9.14 million, cryptocurrency holdings were $7.22 million, working capital was $15.9 million, and total stockholders’ equity was $27.81 million. Total liabilities were $2.06 million; the balance sheet reports no debt notes payable.
- Cash flow statement reports $5.29 million used in operating activities and $6.90 million used in investing activities in the first half, offset by $13.89 million provided by financing activities. Cash ended the period at $9.14 million.
Changes and operating developments
- Q2 mining revenue declined year over year as bitcoin production fell to 228 from 316 BTC, despite a higher average bitcoin price ($8,305 versus $7,185). The filing attributes lower production to the May 2020 bitcoin reward halving and the relocation of miners.
- First-half mining revenue rose year over year, reflecting a higher average bitcoin price ($8,295 versus $5,453), while production declined to 508 from 646 BTC.
- Riot moved mining operations from its Oklahoma facility to Coinmint’s New York facility under a co-location agreement, which provides up to approximately 9.5 MW. The Oklahoma lease ended June 30. Management expects lower overhead and power costs and improved uptime, but these benefits are expectations, not reported results.
- The company retired approximately 8,000 older S9 miners and purchased 1,040 S19 and 2,000 S19 Pro miners for approximately $7.0 million. It reported a $7.0 million equipment deposit at quarter-end; 1,432 new miners were received in July.
- The company raised approximately $14.6 million net of commissions and expenses through its at-the-market offering in the first half, issuing 10.18 million shares. Subsequent to quarter-end, it reported approximately $29.7 million gross proceeds from about 10.8 million additional shares and approximately $1 million from selling 100 bitcoin; management stated cash was approximately $48 million as of the filing.
- Common shares outstanding increased to 36.56 million at June 30 from 25.08 million at December 31, 2019.
Outlook, risks and other significant matters
- Management estimated that full deployment of the purchased S19/S19 Pro miners alongside its 4,000 S17 Pro miners could raise capacity to approximately 566 PH/s, about 460% above 2019 capacity. Its goal was to exceed 1 EH/s in early 2021. The filing gives no earnings or revenue guidance.
- Management expected continued near-term operating losses and said funding may require additional equity or debt, or cryptocurrency sales. It stated existing cash was sufficient for at least 12 months when the financial statements were issued.
- Key business risks include bitcoin-price volatility, mining-reward halving, competition, electricity costs and availability, reliance on co-location, regulation, cybersecurity, and potential dilution or financing constraints. Management said it was monitoring COVID-19 and did not then expect a material effect on long-term plans, operations, or liquidity.
- Coinsquare-related Ontario securities-law admissions and settlement led Riot to fully impair its approximately $9.4 million investment. Riot also disclosed shareholder litigation, an indemnification lawsuit and demands, and a Kashwise fee dispute; outcomes and potential losses were not estimable. The SEC concluded its investigation of Riot and stated it did not intend to recommend enforcement action based on information then available.
- Management concluded disclosure controls and internal control over financial reporting were ineffective due to material weaknesses involving system access, IT change management, third-party data, and segregation of duties for electronic cash disbursements. Remediation was underway; the company said the weakness would not be considered remediated until controls had operated effectively for a sufficient period and been tested.
Important facts for investors to verify
- Reconcile the MD&A statement that first-half operating cash use was $10.9 million with the cash flow statement, which reports $5.29 million.
- Track actual miner delivery, deployment, hash rate, uptime, power costs, and Coinmint agreement terms against management’s capacity and cost-reduction expectations.
- Assess bitcoin production, realized prices, and holdings after the halving, including subsequent sales of 100 BTC.
- Monitor share issuance and remaining ATM capacity, and the effect of continued losses and equity financing on dilution and liquidity.
- Follow remediation and testing of the disclosed material weaknesses, as well as developments in the pending legal matters and potential indemnification claims.