Riot Platforms, Inc. quarterly report, Q3 FY2021

Riot Blockchain, Inc. — Form 10-Q Summary

Business context and reporting period

This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2021. The company focused primarily on Bitcoin mining using Bitmain Antminer ASIC miners and, following its May 26, 2021 acquisition of Whinstone US, Inc., operated a second reportable segment providing data center hosting and related engineering services.

Deployed miners at September 30, 2021: 25,646.
Whinstone acquisition consideration: approximately $460.4 million, consisting primarily of $53.0 million of cash, 11.8 million Riot shares valued at approximately $326.2 million, and $83.0 million of contingent consideration.
Whinstone results included from May 26 through September 30, 2021: approximately $14.1 million of revenue and $13.8 million of net income.

Financial results and key metrics

Metric	Q3 2021	Q3 2020	9M 2021	9M 2020
Total revenue	$64.8 million	$2.5 million	$122.4 million	$6.8 million
Cryptocurrency mining revenue	$53.6 million	$2.4 million	$108.2 million	$6.7 million
Data center hosting revenue	$11.2 million	None	$14.1 million	None
Operating loss	$4.2 million	$2.1 million	$2.0 million	$18.5 million
Net income (loss)	$(15.3) million	$(1.7) million	$11.5 million	$(16.6) million
Basic and diluted EPS	$(0.16)	$(0.04)	$0.13	$(0.46)
Net cash used in operating activities	Not separately provided	Not separately provided	$(61.0) million	$(8.8) million

Q3 mining revenue benefited from 1,292 Bitcoin mined versus 222 in the prior-year quarter and an average Bitcoin price of approximately $41,837 versus $10,823.
Nine-month mining revenue benefited from 2,458 Bitcoin mined versus 730 and an average Bitcoin price of approximately $44,591 versus $9,064.
Cryptocurrency mining cost of revenue was $13.0 million in Q3 and $29.9 million for nine months, representing 24.3% and 27.6% of mining revenue, respectively, compared with 53.4% and 61.8% in the comparable periods.
Q3 selling, general and administrative expense was $40.3 million, including $36.0 million of stock-based compensation. Nine-month stock-based compensation was $37.9 million.
Nine-month results included $17.5 million of cryptocurrency impairment, a $26.3 million realized gain on the Coinsquare investment exchange, a $10.8 million unrealized loss on Mogo shares, and $27.5 million of derivative fair-value gains related to the Whinstone power agreement.

Liquidity, capital expenditures and balance sheet

Cash and cash equivalents at September 30, 2021: $57.9 million, compared with $223.4 million at December 31, 2020.
Working capital: approximately $153.5 million; total stockholders’ equity: $770.3 million; accumulated deficit: $218.4 million.
Total assets increased to $954.4 million from $280.1 million, primarily reflecting the Whinstone acquisition, cryptocurrency holdings, mining equipment and construction activity.
Cryptocurrencies on the balance sheet totaled $102.3 million, including 3,533 Bitcoin and one Bitcoin Cash unit at September 30, 2021. The filing reports these holdings at accounting carrying value after impairment, not necessarily current market value.
Nine-month investing cash outflows were $221.0 million, including $103.2 million of equipment deposits, $78.9 million of property and equipment purchases, and $40.9 million for the Whinstone acquisition.
Nine-month financing cash inflows were $116.5 million, principally from equity offerings.
The company had no reported debt financing or interest expense; liabilities included $83.4 million of contingent consideration, $41.5 million of deferred tax liabilities and $8.4 million of operating lease liabilities.
Management stated that cash on hand was sufficient for operating and capital requirements for at least one year from issuance of the financial statements, while also acknowledging a potential need for additional capital.

Material changes versus the prior comparable period

Revenue increased substantially because of higher Bitcoin prices, greater Bitcoin production and the addition of Whinstone hosting revenue.
The Whinstone acquisition added hosting operations, customer contracts, goodwill of $267.2 million, property and equipment, a power-related derivative asset and significant contingent consideration.
Mining infrastructure expanded materially: property and equipment increased to $200.8 million from $10.1 million, and the company received 18,603 miners during the first nine months.
The company began expanding Whinstone’s developed capacity from 300 MW toward 750 MW, with completion targeted during 2022 and capacity expected to support approximately 112,000 S19j miners based on current configurations.
Common shares outstanding increased to 97.2 million at September 30, 2021 from 78.5 million at December 31, 2020, primarily because of the Whinstone acquisition, ATM offerings, warrant exercises and equity compensation.
Despite positive nine-month net income, operating cash flow was negative because the company retained mined cryptocurrency and made substantial investments in equipment and expansion.

Guidance, outlook, commentary and risks

Management expected the Whinstone expansion to provide capacity for Riot’s future self-mining fleet and additional third-party hosting customers, but the timing and ultimate benefits remain subject to construction, power, technology and execution risks.
Outstanding miner commitments at September 30, 2021 included approximately $89.5 million of remaining purchase obligations under Bitmain contracts. Subsequent to quarter-end, Riot agreed to purchase an additional 9,000 miners for approximately $54 million.
The company’s 2021 ATM program authorized sales of up to $600 million. Through September 30, it raised approximately $34.8 million net; subsequently, it raised approximately $564.3 million gross through the sale of 18.7 million shares, completing the offering.
The company is developing approximately 200 MW of liquid immersion-cooled mining infrastructure. Management stated that large-scale deployment has not been fully proven and could face delays, cost overruns, supplier constraints, technological difficulties or early obsolescence.
Results remain highly sensitive to Bitcoin prices, network difficulty, mining competition, electricity costs, access to power, equipment availability and the ability to liquidate cryptocurrency holdings.
The company relies on third-party co-location arrangements, including Coinmint, and noted that the Coinmint arrangement had not been formally amended to reflect increased power usage, creating continued-use risk.
COVID-19 had affected miner shipments through global supply-chain disruptions, although management did not expect a material long-term impact on operations or liquidity at the filing date.
The company reported material weaknesses in internal control over financial reporting involving user access and segregation of duties, IT change management, and the completeness and accuracy of third-party data used for revenue and cryptocurrency accounting. Whinstone’s internal-control effectiveness had not yet been assessed.
Pending matters included securities class-action and shareholder derivative litigation for which the company could not reasonably estimate the likelihood or magnitude of an unfavorable outcome. The Kashwise litigation was resolved in the company’s favor in August 2021.

Most important facts for investors to verify

Reconcile reported nine-month net income with negative operating cash flow and determine how much earnings depended on noncash fair-value gains, investment gains, stock compensation and cryptocurrency impairment.
Assess Bitcoin price, network difficulty, production levels, mining costs and the carrying value versus market value of the company’s cryptocurrency holdings.
Verify the funding requirements, construction schedule and expected returns of the Whinstone expansion and the 200 MW immersion-cooling project.
Review the dilution from the completed ATM offering, outstanding equity awards and future equity financing needs.
Evaluate the contingent consideration tied to approximately $83.4 million of future power credits and the assumptions supporting its Level 3 valuation.
Monitor remediation of the disclosed material weaknesses and the company’s future assessment of Whinstone’s internal controls.
Review miner purchase commitments, supplier delivery schedules, power availability, Coinmint contract status and potential litigation exposure.