RIOT PLATFORMS, INC. The following discussion and analysis should be read in conjunction with our unaudited condensed interim consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report and with our audited consolidated financial statements for the fiscal year endedDecember 31, 2021 , as included in our 2021 Annual Report. In addition to historical consolidated financial information, the following discussion includes forward-looking statements about our business, financial condition and results of operations, including discussions about management's expectations for our business. These statements represent projections, beliefs and expectations based on current circumstances and conditions and our actual results could differ materially from those discussed in these forward-looking statements. Further, these forward-looking statements should not be construed either as assurances of performance or as promises of a given course of action. You should review the sections entitled "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors" of this Quarterly Report for a discussion of factors that could cause actual results to differ materially - and potentially adversely - from the results described in or implied by the forward-looking statements contained in the following discussion and analysis and elsewhere
in this Quarterly Report. Business Overview: We are a vertically integrated Bitcoin mining company principally engaged in enhancing our capabilities to mine Bitcoin. We also provide the critical mining infrastructure for our institutional-scale hosted clients to mine Bitcoin at our Bitcoin mining facility inRockdale, Texas (the "Whinstone Facility"), and are beginning development of a second large-scale Bitcoin mining data center facility inCorsicana, Texas (the "Corsicana Facility"), which is expected to have approximately one gigawatt ("GW") of capacity for both our Bitcoin mining operations and to host institutional-scale Bitcoin mining and data center clients. Our Whinstone Facility is believed to be the largest Bitcoin mining facility inNorth America , as measured by developed capacity, and we are currently expanding its capacity and developing our new Corsicana Facility to expand our institutional-scale Bitcoin mining capacity.
We operate in an environment which is consistently evolving based on the proliferation of Bitcoin and cryptocurrencies in general. A significant component of our strategy is to effectively and efficiently allocate capital between opportunities that generate the highest return on our capital.
2022 Trends
We anticipate that 2022 will be a year of consolidation in the Bitcoin mining industry, and we believe that, given our relative position in the competitive landscape, we are likely positioned to benefit from this consolidation. As a result of any strategic action undertaken by us, our business and financial results may change significantly. We are continuously evaluating strategic opportunities we may decide to undertake as part of our strategic growth initiatives; however, we can offer no assurances that any strategic opportunities we decide to undertake will be achieved on the schedule or within the budget we anticipate, if at all, in our competitive and evolving industry. See Part I, Item 1A. "Risk Factors" of our 2021 Annual Report for additional discussion regarding potential impacts our competitive and evolving industry may have on our business. Bitcoin Mining The Company's current focus is on its mining operation, and during the three months endedMarch 31, 2022 , it continued to deploy miners with the objective of increasing the Company's operational efficiency and performance. AtMarch 31, 2022 , our Mining business operated approximately 42,919 ASIC miners, with a hash rate capacity of 4.3 exahash per second ("EH/s"). In the three months endedMarch 31, 2022 , we mined 1,405 Bitcoin, which represented an increase of 186% over the 491 Bitcoin we mined in the three months endedMarch 31, 2021 . Based on our existing operations and expected deliveries of miners pursuant to our purchase orders with their manufacturer, Bitmain, we anticipate we will have approximately 120,146 miners in operation, with a hash rate capacity of 12.8 EH/s, utilizing approximately 370 MW of capacity byJanuary 2023 . 26
Miner Purchases and Deployments
AtMarch 31, 2022 , we had purchased, received and/or deployed the following miners: Number of miners
Miners deployed atJanuary 1, 2022
30,907
Miners deployed during the three months endedMarch 31, 2022
12,012
Miners received during the three months ended
5,626
Miners under contract, but not yet received
71,601
Total miners under contract, deployed or expected to be received, atMarch 31, 2022 120,146 As ofMarch 31, 2022 , the Company had outstanding executed purchase agreements for the purchase of miners from Bitmain for a total of 41,601 new S19j-Pro model miners and 30,000 new S19XP model miners, scheduled to be delivered throughDecember 2022 . Pursuant to these agreements, approximately$214.4 million remains payable to Bitmain in installments in advance of shipment of the miners, which is scheduled to occur on a monthly basis throughDecember 2022 .
COVID-19
The COVID-19 global pandemic has been unprecedented and unpredictable; its impact is likely to continue to result in significant national and global economic disruption, which may adversely affect our business. Based on our current assessment, however, we do not expect any material impact on our long-term development, our operations, or our liquidity due to the worldwide spread of COVID-19, other than the potential impacts of COVID-19 on global logistics discussed below. We are actively monitoring this situation and the possible effects on our financial condition, liquidity, operations, suppliers, and industry. Global Logistics: Global supply logistics have caused delays across all channels of distribution. Similarly, we have also experienced delays in certain of our miner delivery schedules and in our infrastructure development schedules due to constraints on the globalized supply chains for miners, electricity distribution equipment and construction materials. Through the date of this Quarterly Report, we have been able to effectively mitigate any delivery delays to avoid materially impacting our miner deployment schedule, however, there are no assurances we will be able to continue to mitigate any such delivery delays in the future. Additionally, the expansion of the Whinstone Facility and the development of our newCorsicana Facility requires large quantities of construction materials, specialized electricity distribution equipment and other component parts that can be difficult to source. We have procured and hold many of the required materials to help mitigate against global supply logistic and pricing concerns. We monitor developments in the global supply chain and how that may potentially impact our expansion plans. See the discussion under the heading "Risk Factors" in Part II, Item 1A of this Quarterly Report and under Part I, Item 1A of the 2021 Annual Report for additional discussion regarding potential impacts the global supply chain crisis may have on our operations and plans for expansion. 27 Summary of Mining Results The following table presents additional information about our Mining activities, including Bitcoin production and sales of the Bitcoin the Company mined during the three months endedMarch 31, 2022 , and 2021 ($ in thousands): Quantities of Bitcoin Amounts Balance at January 1, 2022 4,884$ 159,544 Revenue recognized 1,405 57,945 Proceeds from sale (200 ) (9,418 )
Exchange of Bitcoin for employee compensation (27 ) (1,283 ) Realized gain on sale/exchange - 9,236 Impairment - (26,390 ) Balance at March 31, 2022 6,062$ 189,634 Quantities of Bitcoin Amounts Balance at January 1, 2021 1,078$ 11,626 Revenue recognized 491 23,173 Other - (232 ) Balance at March 31, 2021 1,569$ 34,567
Results of Operations Comparative Results for the Three Months Ended
Revenue: For the three months endedMarch 31, 2022 and 2021, mining revenue was$57.9 million , and$23.2 million , respectively. The increase of$34.7 million in mining revenue was due to a higher number of Bitcoin mined of 1,405 in the 2022 period, as compared to 491 in the 2021 period, partially offset by lower Bitcoin values in the 2022 period, averaging$41,241 per coin as compared to$46,729 per coin in the 2021 period. For the three months endedMarch 31, 2022 , hosting revenue was$9.7 million , and there was no hosting revenue for the three months endedMarch 31, 2021 . Hosting revenue includes upfront payments which we record as deferred revenue and generally recognize as services are provided. We provide energized space and operating and maintenance services to third-party mining companies who locate their mining hardware at our Whinstone Facility under long-term contracts. We account for these agreements as a single performance obligation for services being delivered in a series with delivery being measured by daily successful operation of the mining hardware. As such, we recognize revenue over the life of the contract as its series of performance obligations are met. The contracts are recognized in the amount for which we have the right to invoice because we elected the "right to invoice" practical expedient. For the three months endedMarch 31, 2022 , engineering revenue was$12.1 million , and there was no engineering revenue for the three months endedMarch 31, 2021 . Engineering revenue is derived from the sale of custom products built to customers' specifications under fixed-price contracts with one identified performance obligation. Engineering revenues are recognized over time as performance creates or enhances an asset with no alternative use, and for which the Company has an enforceable right to receive compensation as defined under the contract.
Other revenue consisting of license fees was not significant in either period.
Costs and expenses: Cost of revenues for mining for the three months endedMarch 31, 2022 and 2021 was$19.1 million and$7.5 million , respectively, representing an increase of approximately$11.6 million . As a percentage of mining revenue, cost of revenues totaled 33.0% and 32.5% for each of the three months endedMarch 31, 2022 and 2021, respectively. Cost of revenues consists primarily of direct production costs of mining operations, including electricity, labor, insurance and the variableCoinmint hosting fee, but excluding depreciation and amortization, which are separately stated. The increase of$11.6 million in cost of revenues is primarily due to the increases in variable mining costs, including the variable hosting fees, associated with increases in mining revenues. 28
Cost of revenues for hosting for the three months endedMarch 31, 2022 , was$15.0 million and there were no hosting costs for the three months endedMarch 31, 2021 . The costs consisted primarily of direct power costs, with the balance primarily incurred for rent and compensation costs. Cost of revenues for engineering for the three months endedMarch 31, 2022 was$11.5 million and there were no engineering costs for the three months endedMarch 31, 2021 . The 2022 costs consisted primarily of direct materials and labor, as well as indirect manufacturing costs. Selling, general and administrative expenses during the three months endedMarch 31, 2022 and 2021 totaled$10.9 million and$5.5 million , respectively. Selling, general and administrative expenses consist of stock-based compensation, legal and professional fees and other personnel and related costs. The increase of$5.4 million is primarily due to an increase in stock-compensation expense of$2.1 million resulting from additional awards and compensation expense, which increased by$3.5 million due to additional employees to support the Company's growth.
Depreciation and amortization expenses during the three months endedMarch 31, 2022 totaled$14.2 million , which is an increase of approximately$11.4 million , as compared to$2.8 million for the three months endedMarch 31, 2021 . The increase is primarily due to higher depreciation expense recognized for the Whinstone Facility and our recently acquired miners. Change in fair value of our derivative asset for the three months endedMarch 31, 2022 , was$46.2 million , including$43.7 million recorded to adjust the fair value of our Power Supply Agreement, which was classified as a derivative asset and measured at fair value on the date of our acquisition of Whinstone, and$2.5 million from power sales into theERCOT marketplace through Whinstone's participation inERCOT's energy demand response programs.
Realized gain on sale/exchange of cryptocurrencies for the three months ended
Impairment of cryptocurrencies for the three months endedMarch 31, 2022 was$26.4 million arising from the decline in Bitcoin prices. There was no impairment of cryptocurrencies recognized during the three months endedMarch 31, 2021 . Other income and expenses:
Other expense for the three months ended
Non-GAAP Measures
In addition to consolidatedU.S. GAAP financial measures, we consistently evaluate our use and calculation of the non-GAAP financial measure, "Adjusted EBITDA." Adjusted EBITDA is a financial measure defined as our EBITDA, adjusted to eliminate the effects of certain non-cash and / or non-recurring items, that do not reflect our ongoing strategic business operations. EBITDA is computed as net income before interest, taxes, depreciation, and amortization. Adjusted EBITDA is EBITDA further adjusted, for certain income and expenses, management believes results in a performance measurement that represents a key indicator of the Company's core business operations of Bitcoin mining. The adjustments include fair value adjustments such as derivative power contract adjustments, equity securities value changes, and non-cash stock-based compensation expense, in addition to financing and legacy business income and expense items.
We believe Adjusted EBITDA can be an important financial measure because it allows management, investors, and our board of directors to evaluate and compare our operating results, including our return on capital and operating efficiencies, from period-to-period by making such adjustments.
29
Adjusted EBITDA is provided in addition to, and should not be considered to be a substitute for, or superior to net income, the comparable measure underU.S. GAAP. Further, Adjusted EBITDA should not be considered as an alternative to revenue growth, net income, diluted earnings per share or any other performance measure derived in accordance withU.S. GAAP, or as an alternative to cash flow from operating activities as a measure of our liquidity. Adjusted EBITDA has limitations as an analytical tool, and you should not consider such measures either in isolation or as substitutes for analyzing our results as reported underU.S. GAAP.
Reconciliations of Adjusted EBITDA to the most comparable
Reconciliation of GAAP and Non-GAAP Financial Information
Three Months Ended March 31,
(in thousands) 2022 2021
Net income (loss) $ 35,629 $ 7,530
Interest (income) expense 220 (175 )
Income tax expense (benefit) 312 - Depreciation and amortization 14,245 2,846 EBITDA 50,406 10,201 Adjustments:
Non-cash/non-recurring operating expenses:
Stock-based compensation expense 3,042 936 Acquisition-related costs 78 - Change in fair value of derivative asset (gain)
loss (43,683 ) - Change in fair value of contingent consideration (gain) loss 176 - Unrealized (gain) loss on marketable equity securities 1,611 - Other (income) expense 137 -
Other revenue, (income) expense items:
License fees (24 ) (24 ) Non-GAAP Adjusted EBITDA$ 11,743 11,113
LIQUIDITY AND CAPITAL RESOURCES
AtMarch 31, 2022 , we had working capital of approximately$323.5 million , which included cash and cash equivalents of$113.6 million . We reported net income of$35.6 million during the three months endedMarch 31, 2022 . Net income included$7.4 million in non-cash items consisting primarily of the change in fair value of our derivative asset of$43.7 million and a realized gain on sale/exchange of cryptocurrencies of$9.2 million , partially offset by the impairment of cryptocurrencies of$26.4 million , stock-based compensation expense of$3.0 million , depreciation and amortization of$14.2 million , an unrealized loss on marketable securities of$1.6 million , and other expenses of$0.3 million .
30 Contractual Commitments AtMarch 31, 2022 , we had the following contractual commitments (in thousands): Original Purchase Additional Open Purchase Deposit Agreement Date * Commitment Purchases Commitment
Balance
Second Quarter 2022 -
Second Quarter 2022 -
October 29, 2021 56,250 - 22,500 33,750 Third Quarter 2022
Third Quarter 2022 -
November 22, 2021 32,550 - 15,278 17,272 Fourth Quarter 2022
Third Quarter 2022 -
December 10, 2021 97,650 - 45,833 51,817 Fourth Quarter 2022
Third Quarter 2022 -
December 24, 2021 202,860 - 95,256 107,604 Fourth Quarter 2022
Total
* Pursuant to the Company's agreements with Bitmain, the Company is responsible for all shipping charges incurred in connection with the delivery of the miners.
Coinmint Co-location Mining Services Agreement
OnApril 8, 2020 , the Company entered into an agreement withCoinmint (the "Coinmint Agreement"), pursuant to whichCoinmint agreed to provide up to approximately 9.5 MW of electrical power and to perform all maintenance necessary to operate Riot's miners deployed at the Coinmint Facility. In exchange,Coinmint is reimbursed for direct production expenses and receives a performance fee based on the net cryptocurrencies generated by Riot's miners deployed at the Coinmint Facility. The amount of electrical power supplied to Riot's miners at the Coinmint Facility has subsequently been increased to accommodate Riot's expanding miner fleet. However, no formal written amendment to the Coinmint Agreement solidifying Riot's continuing access to sufficient power to operate its expanding fleet of miners has been entered into withCoinmint . The initial term of the Coinmint Agreement was six months, with automatic renewals for subsequent three-month terms until terminated as provided in the agreement. Miners As ofMarch 31, 2022 , the Company had outstanding executed purchase agreements for the purchase of miners from Bitmain for a total of 41,601 new S19j-Pro model miners and 30,000 new S19XP model miners, scheduled to be delivered throughDecember 2022 . Pursuant to these agreements, approximately$214.4 million remains payable to Bitmain in installments in advance of shipment of the miners, which is scheduled to occur on a monthly basis throughDecember 2022 . Revenue from Operations
Funding our operations on a go-forward basis will rely significantly on our ability to mine Bitcoin at a price above our Mining costs and revenue generated from our Hosting and Engineering customers. We expect to generate ongoing revenues from Bitcoin rewards from our Mining operations and our ability to liquidate Bitcoin rewards at future values will be evaluated from time-to-time to generate cash for operations. Generating Bitcoin rewards, for example, which exceed our production and overhead costs will determine our ability to report profit margins related to such mining operations, although accounting for our reported profitability is significantly complex. Furthermore, regardless of our ability to generate cash from the sale of our Bitcoin from our Mining business, we may need to raise additional capital in the form of equity or debt to fund our operations and pursue our business strategy. 31
The ability to raise funds through the sale of equity, debt financings, or the sale of Bitcoin to maintain our operations is subject to many risks and uncertainties and, even if we were successful, future equity issuances or convertible debt offerings could result in dilution to our existing stockholders and any future debt or debt securities may contain covenants that limit our operations or ability to enter into certain transactions. Our ability to realize revenue through Bitcoin production and successfully convert Bitcoin into cash or fund overhead with Bitcoin is subject to a number of risks, including regulatory, financial and business risks, many of which are beyond our control. Additionally, we have observed significant historical volatility in the market price of Bitcoin and, as such, future prices cannot be predicted. See the discussion of risks affecting our business under the heading "Risk Factors" in Part II, Item 1A of this Quarterly Report and in Part I, Item 1A of the 2021 Annual Report.
If we are unable to generate sufficient revenue from our Mining operations, Hosting operations or Engineering operations when needed or secure additional sources of funding, it may be necessary to significantly reduce our current rate of spending or explore other strategic alternatives.
At-the-Market Equity Offering
The Company entered into a Sales Agreement withCantor Fitzgerald & Co. ,B. Riley Securities, Inc. ,BTIG, LLC ,Roth Capital Partners, LLC ,D.A. Davidson & Co. ,Macquarie Capital (USA) Inc. , andNorthland Securities, Inc. (the "Sales Agents") datedMarch 31, 2022 (the "Sales Agreement"), pursuant to which the Company may, from time to time, sell up to$500 million in shares of the Company's common stock through the Sales Agents, acting as the Company's sales agent and/or principal, in a continuous at-the-market offering (the "2022 ATM Offering"). The Company will pay the Sales Agents a commission of up to 3.0% of the aggregate gross proceeds the Company receives from all sales of the Company's common stock under the Sales Agreement. As ofMarch 31, 2022 , the Company had not received any proceeds from the 2022 ATM Offering. Subsequent toMarch 31, 2022 , and as of the date of this filing, the Company received net proceeds on sales of 9.9 million shares of common stock under the Sales Agreement of approximately$140.3 million (after deducting$2.9 million in commissions and expenses) at a weighted average price of$14.44 .
Legal Proceedings
The Company has been named a defendant in several class action and other investor related lawsuits as more fully described under the heading "Legal Proceedings" in Part I, Item 3 of the 2021 Annual Report and in Note 16. "Commitments and Contingencies" in the unaudited Notes to Condensed Consolidated Financial Statements included under Part I, Item 1 of this Quarterly Report. While the Company maintains policies of insurance, such policies may not cover all of the costs or expenses associated with responding to such matters or any liability or settlement associated with any lawsuits and are subject to significant deductible or retention amounts.
Operating Activities
Net cash used in operating activities was$45.3 million during the three months endedMarch 31, 2022 . Cash was generated from operations by net income of$35.6 million , less non-cash items of$63.5 million , consisting primarily of the increase in Bitcoin held of$56.7 million , the change in fair value of our derivative asset of$43.7 million and a realized gain on the sale/exchange of cryptocurrencies of$9.2 million , partially offset by the impairment of cryptocurrencies of$26.4 million , depreciation and amortization of$14.2 million , stock-based compensation expense of$3.0 million , and an unrealized loss on marketable equity securities of$1.6 million , net of other immaterial items. The change in assets and liabilities of$17.5 million consisted primarily of decreased accounts payable and accrued expenses of$14.1 million , increased prepaid expenses and other current assets of$13.8 million , change in fair value of future power credits of$4.7 million , increased costs and estimated earnings in excess of billings of$1.2 million , increased accounts receivable of$0.6 million , decreased deferred revenue of$0.5 million , decreased lease liability of$0.4 million and decreased billings in excess of costs and estimated earnings of$0.3 million , partially offset by proceeds from sale of cryptocurrencies
of$9.4 million . Net cash used in operating activities was$6.0 million during the three months endedMarch 31, 2021 . Cash was generated from operations by income of$7.5 million , less non-cash items of$3.7 million , consisting of depreciation and amortization totaling$2.8 million and stock-based compensation totaling$0.9 million , net of other immaterial items. Cryptocurrencies increased by$22.9 million , prepaid expenses and other current assets decreased$0.6 million , and accounts payable and accrued expenses increased$5.0 million . 32 Investing Activities Net cash used in investing activities during the three months endedMarch 31, 2022 was$140.3 million , primarily consisting of deposits on equipment of$103.2 million and purchases of property and equipment of$37.1 million . Net cash used in investing activities during the three months endedMarch 31, 2021 was$58.7 million , primarily consisting of deposits on equipment of$56.4 million and purchases of property and equipment of$2.3 million .
Financing Activities
Net cash used in financing activities was$13.2 million during the three months endedMarch 31, 2022 , which consisted of the shares of common stock withheld to satisfy employee withholding taxes of$8.3 million in connection with the settlement of vested equity awards granted under our 2019 Equity Plan and the payment of contingent consideration liability of$4.8 million . Net cash provided by financing activities was$82.3 million during the three months endedMarch 31, 2021 , which consisted of net proceeds from the issuance of our common stock in connection with ourDecember 2020 ATM Offering of$82.7 million and proceeds received from the exercise of common stock warrants of$0.8 million , offset by the repurchase of common stock to pay employee withholding taxes of$1.2 million . Critical Accounting Policies
Our critical accounting policies and significant estimates are detailed in our 2021 Annual Report. Our critical accounting policies and significant estimates have not changed from those previously disclosed in our 2021 Annual Report, except for those accounting subjects described under the heading "Recently Issued and Adopted Accounting Pronouncements" in Note 3. "Basis of Presentation, Summary of Significant Accounting Policies and Recent Accounting Pronouncements" in the unaudited Notes to Condensed Consolidated Financial Statements included under Part I, Item 1 of this Quarterly Report.
Recently Issued and Adopted Accounting Pronouncements
The Company has evaluated all recently issued accounting pronouncements and believes such pronouncements do not have a material effect on the Company's financial statements. See Note 3. "Basis of Presentation, Summary of Significant Accounting Policies and Recent Accounting Pronouncements" in the unaudited Notes to Condensed Consolidated Financial Statements included under Part I, Item 1 of this Quarterly Report.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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