Business context and reporting period
Riot Blockchain, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. The company principally mines Bitcoin and, following its May 26 acquisition of Whinstone US, also operates a Bitcoin mining data-center hosting business. Whinstone’s results are included only from the acquisition date.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $34.3 million | $1.9 million | $57.5 million | $4.3 million |
| Operating income (loss) | ($5.2 million) | ($12.0 million) | $2.2 million | ($16.4 million) |
| Net income (loss) | $19.3 million | ($10.6 million) | $26.9 million | ($14.9 million) |
| Operating cash flow | Not provided separately | Not provided separately | ($27.2 million) | ($5.3 million) |
| Cash and equivalents at period end | — | $147.2 million | $9.1 million |
Q2 cryptocurrency-mining revenue was $31.5 million, versus $1.9 million; hosting revenue contributed $2.9 million after Whinstone closed. Six-month mining revenue was $54.6 million, compared with $4.3 million. Management attributed the mining-revenue increase to both higher Bitcoin prices and more Bitcoin awards: 1,166 BTC in the first half of 2021 versus 508 in 2020. Mining cost of revenue, excluding depreciation and amortization, was 29.7% of mining revenue in Q2 and 30.9% for the first half, compared with 75.1% and 66.5%, respectively, in 2020.
Net income included substantial non-operating and non-cash items. The six-month results included a $26.3 million realized gain from the Coinsquare/Mogo investment transaction, a $17.5 million cryptocurrency impairment, a $17.5 million fair-value gain on the Whinstone power-supply derivative, and $18.3 million in acquisition-related costs. Q2 operating loss reflected $17.0 million of acquisition costs and $17.5 million of cryptocurrency impairment, partly offset by the derivative fair-value gain. Thus, reported net income does not equate to recurring mining profitability.
At June 30, total assets were $906.4 million, total liabilities $192.2 million, and stockholders’ equity $714.2 million; working capital was $183.8 million. Current assets included $147.2 million cash, $48.3 million of cryptocurrencies, and $24.8 million of Mogo shares. The balance sheet reports no borrowings or interest expense; it does include $8.3 million of operating lease liabilities and an $83.1 million contingent consideration liability. Cash declined $76.2 million from year-end. Six-month investing cash outflow was $131.2 million, primarily equipment deposits and the Whinstone acquisition; financing cash inflow was $82.2 million, principally ATM equity proceeds.
Material changes and strategic developments
- On May 26, Riot acquired Whinstone for approximately $460.4 million of consideration, including $80 million of cash (subject to adjustments), 11.8 million Riot shares valued at approximately $326.2 million, and contingent consideration tied to power credits. The preliminary allocation included $267.4 million of goodwill and $90.3 million of acquired intangible assets.
- Whinstone generated approximately $2.9 million of revenue and $12.6 million of net income from acquisition through June 30; the short-period net income included unusual power-related items. Its $23.5 million of deferred revenue is expected to be recognized primarily over underlying contracts’ remaining lives, approximately eight years.
- Riot had deployed 16,146 miners by June 30. It planned to expand Whinstone from 300 MW of developed capacity to 750 MW, with the first portion expected by Q1 2022 and the remainder in Q2 2022. Management said the expansion is intended to support Riot’s mining fleet and third-party hosting.
- Riot completed its $200 million December 2020 ATM offering in January 2021, raising $82.7 million net during the first half. Common shares outstanding increased from 78.5 million at year-end to 95.9 million at June 30.
Outlook, risks and contingencies
Management said existing cash was sufficient for operating and capital requirements for at least one year from issuance of the financial statements. It also cautioned that operations and future funding depend heavily on Bitcoin prices, mining economics, and the ability to convert Bitcoin holdings into cash; additional capital may be needed. The company had equipment commitments for miners, including approximately $145.7 million of S19j purchases scheduled for delivery from late 2021 into 2022, with remaining amounts payable in advance of shipment.
Whinstone’s February 2021 Texas power-storm settlement included approximately $125.1 million of power-sale amounts: $29.0 million cash received after power-management fees, approximately $59.7 million expected as future power-bill credits, and $26.3 million contingent on ERCOT remittance. Riot is obligated to pay the seller additional consideration when qualifying credits are realized; the recorded contingent liability was $83.1 million at June 30. The derivative asset and contingent consideration valuations rely on significant unobservable assumptions and may change.
Key risks include Bitcoin-price and mining-difficulty volatility, power availability and cost, competition, cybersecurity, miner delivery and deployment, acquisition integration and potential goodwill impairment, and the company’s reliance on equity financing. Riot said its Coinmint hosting arrangement had no formal written amendment despite increased power use, and continued access was not assured. COVID-19 remained under monitoring, though management did not expect a material impact on long-term plans, operations, or liquidity based on its then-current assessment.
Disclosure controls and internal control over financial reporting were deemed ineffective at June 30 because of material weaknesses in system access and segregation of duties, IT change management, and completeness and accuracy controls over third-party data. Management was implementing remediation and expected to work on it over the next three to four quarters; Whinstone’s controls had not yet been assessed. A securities class action remained pending, with outcome and potential loss not reasonably estimable. A separate Kashwise suit was resolved in August 2021 by summary judgment and final judgment for Riot.
Important facts for investors to verify
- How much of first-half earnings and future results is attributable to recurring mining and hosting operations rather than investment gains, power-derivative remeasurement, impairments, or acquisition items.
- Whether the Whinstone expansion reaches its stated 750 MW capacity and timelines, and whether power costs, customer demand, and miner deliveries support the expected economics.
- The realization, timing, and ultimate value of ERCOT-related power credits and the corresponding contingent payment to the former Whinstone owner.
- Bitcoin holdings’ carrying value and subsequent price movements, including the effect of impairment accounting and any sales needed to fund operations.
- Remediation progress for the disclosed material weaknesses, as well as the potential dilution and funding implications of future capital needs.
- Developments in the pending securities class action and any subsequent changes to acquisition purchase-price estimates or goodwill and intangible-asset valuations.