Riot Platforms, Inc. quarterly report, Q2 FY2022

Riot Platforms, Inc. (filed as Riot Blockchain, Inc.) — Q2 2022 Form 10-Q

Reporting period: Three and six months ended June 30, 2022; filed August 15, 2022. The company is a vertically integrated Bitcoin miner with Bitcoin Mining, Data Center Hosting, and Engineering segments. Operations are centered at the 700-megawatt Whinstone Facility in Rockdale, Texas, with development beginning on the approximately one-gigawatt Corsicana, Texas facility.

Financial performance and condition

Metric	Q2 2022	Q2 2021	Six months 2022	Six months 2021
Total revenue	$72.9 million	$34.3 million	$152.7 million	$57.5 million
Operating income (loss)	$(366.0) million	$(5.1) million	$(328.1) million	$2.2 million
Net income (loss)	$(366.3) million	$19.3 million	$(330.7) million	$26.9 million
Net loss per share	$(2.81)	$0.22	$(2.67)	$0.31
Adjusted EBITDA	$(65.2) million	$2.4 million	$(53.4) million	$14.8 million
Net cash used in operating activities	Not provided for quarter	Not provided for quarter	$(14.4) million	$(27.2) million

Revenue mix: Q2 Mining revenue was $46.2 million, Data Center Hosting revenue was $9.8 million, and Engineering revenue was $16.9 million. Six-month revenue was $104.1 million, $19.5 million, and $29.1 million, respectively.
Revenue growth: Total revenue increased approximately 112% in Q2 and 165% for the six-month period versus the prior comparable periods, principally from higher Bitcoin production, expanded hosting activity, and the newly acquired Engineering business.
Mining production: The company mined 1,395 Bitcoin in Q2 and 2,800 Bitcoin in the first six months, versus 675 and 1,166, respectively, in the prior-year periods. The average Bitcoin value recognized was approximately $33,081 in Q2 and $37,175 for the six months.
Margins: Mining cost of revenue represented 39.0% of Mining revenue in Q2 and 35.6% for the six months, compared with 29.7% and 30.9% in the prior-year periods. Consolidated operating margin was approximately negative 502% in Q2 and negative 215% for the six months, heavily affected by impairments and fair-value items.
Cash and liquidity: Cash and cash equivalents were $270.5 million at June 30, 2022, compared with $312.3 million at December 31, 2021. Working capital was approximately $395.9 million. Management stated that available cash and Bitcoin were sufficient for operating and capital requirements for at least one year from issuance of the financial statements.
Bitcoin holdings: The company held 6,653 Bitcoin with a carrying value of $126.6 million at June 30, 2022, after recognizing $126.2 million of impairment during the first six months.
Debt and liabilities: The filing states that the company had no long-term debt. Total liabilities were $147.7 million, including $21.5 million of operating lease liabilities and $54.5 million of contingent consideration related to future power credits.
Capital spending: Six-month investing cash outflows were $269.9 million, including $192.5 million of equipment deposits and $77.4 million of property and equipment purchases. Property and equipment, net, increased to $411.2 million from $263.0 million at year-end 2021.
Equity financing: The 2022 at-the-market offering generated $267.0 million of net proceeds through June 30 from the sale of 30.6 million common shares at a weighted-average price of $8.92. Shares outstanding increased to 148.0 million from 116.7 million at December 31, 2021.

Material changes versus the prior comparable period

Revenue expanded substantially, but profitability deteriorated from prior-year income to significant losses. Adjusted EBITDA declined to a loss of $53.4 million for the six months from positive $14.8 million.
The company recorded a $349.1 million non-cash goodwill impairment, eliminating all goodwill, due primarily to the decline in Bitcoin prices, lower market multiples, higher interest rates, and reduced equity-market valuations.
Bitcoin impairment increased to $126.2 million for the six months from $17.5 million in the prior-year period.
Depreciation and amortization increased to $34.8 million from $8.6 million for the six months, reflecting the Whinstone facility and newly deployed miners.
Data Center Hosting and Engineering became materially larger businesses. Engineering revenue was $29.1 million for the six months, compared with none in the prior-year period, following the ESS Metron acquisition.
The company completed the conversion of its remaining Series B preferred stock into common stock.
Riot exited its Coinmint co-location arrangement effective July 8, 2022 and began relocating miners to Whinstone to reduce third-party hosting costs and use its power supply arrangement.

Guidance, outlook, risks, contingencies, and unusual items

Operating outlook: Based on existing operations and contracted Bitmain deliveries, management expected approximately 115,450 miners and 12.5 EH/s of hash-rate capacity by the first quarter of 2023. This is a stated expectation, not guaranteed guidance.
Corsicana expansion: The first phase is planned at 400 megawatts, with operations expected after substation commissioning in summer 2023. Estimated first-phase cost was approximately $333 million, including approximately $89.4 million expected during the remainder of 2022, $223.9 million in 2023, and $9.5 million in the first quarter of 2024. Approximately $10.1 million had been incurred through June 30, 2022.
Miner commitments: Open purchase commitments to Bitmain totaled approximately $110.6 million, with deliveries scheduled through December 2022. Deposits on equipment totaled $357.4 million at June 30.
Funding needs: Management expects to rely on Bitcoin mining, hosting and Engineering revenue, Bitcoin sales, and potentially additional equity or debt financing to fund operations and expansion. Additional equity financing could dilute shareholders.
Market and operating risks: Results remain highly sensitive to Bitcoin price, network difficulty and hash rate, electricity costs and availability, regulatory developments, cybersecurity, supply-chain disruptions, inflation, labor availability, and the ability to obtain and deploy miners on schedule.
Fair-value volatility: A $104.6 million increase in the fair value of the power agreement derivative and $8.3 million of power curtailment credits benefited six-month operating results, but these items are subject to significant estimates and market conditions.
Legal contingencies: GMO Gamecenter and GMO Internet sued Whinstone, seeking compensatory damages exceeding $50 million for alleged contract breaches. Whinstone denied the allegations and intended to assert a counterclaim. The filing states that the company could not reasonably estimate the outcome or potential loss for ongoing shareholder class and derivative actions.
Internal controls: Management concluded that disclosure controls and procedures were not effective as of June 30, 2022 because of material weaknesses involving user access, IT change management, third-party data, and controls at Whinstone. Remediation was expected to be implemented before December 31, 2022, but management provided no assurance of successful remediation.
Subsequent events: After June 30, the company raised approximately $31.5 million net from issuing 6.5 million shares and sold 275 Bitcoin for approximately $5.6 million.

Most important facts for investors to verify

Whether Bitcoin prices, mining difficulty, electricity costs, and network hash rate support the expected expansion economics.
Delivery, payment, and deployment timing for the remaining Bitmain commitments and the targeted 115,450-miner fleet.
Funding capacity for the approximately $333 million first phase of Corsicana and other capital requirements without excessive dilution.
The sustainability of hosting and Engineering revenue, including customer concentration in Data Center Hosting.
The effect of Bitcoin impairments and the accounting treatment of held Bitcoin on reported earnings and book value.
Progress in remediating the material weaknesses in internal control over financial reporting.
The potential financial and operational impact of the GMO litigation and other shareholder-related proceedings.
The company’s post-quarter share issuance and Bitcoin sales, including their effect on liquidity, dilution, and Bitcoin holdings.