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 of this Quarterly Report entitled "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors" 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 Rockdale Facility, with 700 megawatts in total capacity. Our Rockdale Facility is believed to be the largest Bitcoin mining facility inNorth America , as measured by developed capacity, and we are currently expanding its capacity. Additionally, we are beginning development of a second large-scale Bitcoin mining data center at our Corsicana Facility, which is expected to have approximately one gigawatt of available capacity for both our Bitcoin mining operations and hosting of institutional-scale Bitcoin mining and data center clients.
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 among opportunities that generate the highest return on our capital.
Industry Trends During 2022, we observed a number of companies in the Bitcoin ecosystem experience significant challenges and failure due to the precipitous decline in the price of Bitcoin. We anticipate this trend will likely continue as companies attempt to shift their business models to operate on compressed margins. The dramatic increase in the price of Bitcoin observed in the market during the last few years caused many companies to over-leverage themselves, operating in an unsustainable way given the recent instability in the price of Bitcoin. Despite challenges in the ecosystem, Riot continues to focus on building long-term stockholder value by taking strategic action to vertically integrate, expanding the Rockdale Facility and developing our Corsicana Facility. As we grow our business, we continue to focus on deploying our efficient mining fleet, at scale, while realizing benefit of being an owner and operator of our Bitcoin mining facilities. We anticipate that other companies in the industry will continue to experience challenges, and the end of 2022 and the start of 2023 will continue to be a period of consolidation in the Bitcoin mining industry, and we believe that, given our relative position, liquidity and absence of long-term debt, 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 which we may decide to undertake as part of our strategic growth initiatives; however, we can offer no assurances that any strategic opportunities which 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. 32 Bitcoin Mining
The Company's current focus is on its mining operation, and during the nine months endedSeptember 30, 2022 , we continued to deploy miners at ourRockdale Facility and continued development activities at the Corsicana Facility, with the objective of increasing the Company's operational efficiency and performance. As ofSeptember 30, 2022 , our Mining business operated approximately 55,728 ASIC miners, with a hash rate capacity of approximately 5.6 exahash per second ("EH/s"). During the nine months endedSeptember 30, 2022 , we mined 3,842 Bitcoin, which represented an increase of 36% over the 2,458 Bitcoin we mined during the nine months endedSeptember 30, 2021 . Based on our existing operations and expected deliveries of miners pursuant to our purchase orders with their manufacturer, Bitmain, we anticipate having approximately 115,450 miners in operation, with a hash rate capacity of approximately 12.5 EH/s by the first quarter of 2023. During the three months endedSeptember 30, 2022 , we fully exited our Mining operations at the Coinmint Facility. We believe this transition will lower our overall cost of revenues for the Mining business as new miners will be deployed at the Rockdale Facility. See Note 8. "Property and Equipment" to these unaudited Notes to Condensed Consolidated Financial Statements. Our Bitcoin mining operations are subject to unique industry risks such as the historical volatility in the demand for, and price of, Bitcoin and changes in the public perception of Bitcoin.
Miner Purchases and Deployments
AtSeptember 30, 2022 , we had purchased, received and/or deployed the following miners: Number of miners
Miners deployed atJanuary 1, 2022
30,907
Net miners deployed during the nine months endedSeptember 30, 2022
24,821
Miners received, but not yet deployed
27,678
Miners under contract, but not yet received
32,044
Total miners under contract, deployed or expected to be
received, at
115,450 As ofSeptember 30, 2022 , the Company had outstanding executed purchase agreements for the purchase of miners from Bitmain for a total of approximately 12,097 new model S19j Pro miners and 19,947 new model S19XP miners, scheduled to be shipped throughDecember 2022 . Pursuant to these agreements, approximately$44.9 million remains payable to Bitmain in installments in advance of shipment of the miners, which is scheduled to occur monthly throughDecember 2022 , subject to future adjustments as provided in the contracts.
To take advantage of our low-cost power supply agreement at the Company's
Rockdale Facility and eliminate third-party hosting fees, during the nine months
ended
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 impact 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. In addition, nationally, we have experienced and are experiencing varying degrees of inflation, resulting in part from various supply chain disruptions, increased shipping and transportation costs, and increased raw material and labor costs, as well as other disruptions resulting from the continuing COVID-19 pandemic and general global economic conditions. This inflationary impact on our cost structure has contributed to adjustments in operations, ability to obtain materials and retain talent, despite a continued focus on reducing our costs where possible. 33 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 Rockdale 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 continue to monitor developments in the global supply chain and assess their potential impact on our expansion plans.
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 nine months endedSeptember 30, 2022 , and 2021 ($ in thousands): Quantities (in coins) Amounts Balance at January 1, 2022 4,884$ 159,544
Revenue recognized from Bitcoin mined 3,842 126,166 Proceeds from sale of Bitcoin (1,925 ) (52,491 ) Exchange of Bitcoin for employee compensation (35 ) (1,434 ) Realized gain on sale/exchange of Bitcoin - 25,443 Impairment of Bitcoin - (132,077 ) Balance at September 30, 2022 6,766$ 125,151
Quantities
(in coins) Amounts
Balance at January 1, 2021 1,078 $ 11,626 Revenue recognized from Bitcoin mined 2,458 108,213 Proceeds from sale of Bitcoin - - Exchange of Bitcoin for employee compensation (3 ) (113 ) Realized gain on sale/exchange of Bitcoin - 94 Impairment of Bitcoin - (17,507 ) Balance at September 30, 2021 3,533$ 102,313
Results of Operations Comparative Results for the Three Months Ended
Revenue:
For the three months endedSeptember 30, 2022 and 2021, Mining revenue was$22.1 million , and$53.6 million , respectively. The decrease of$31.5 million was due to a lower number of Bitcoin mined of 1,042 in the 2022 period, as compared to 1,292 in the 2021 period, combined with lower Bitcoin values in the 2022 period, averaging$21,184 per coin as compared to$41,837 per coin in the 2021 period. The primary reason for the decrease in the number of Bitcoin mined was due to the Company's effective employment of its proprietary power strategy to significantly reduce overall power costs. As noted below, during the three months endedSeptember 30, 2022 , the Company earned$13.1 million in power credits, to be credited against its power invoices, as a result of temporarily pausing its operations. The power credits equate to approximately 760 Bitcoin, as computed by using the average daily closing BTC prices on a monthly basis. During the three months endedSeptember 30, 2021 , the Company earned$2.5 million in power credits, or the equivalent of approximately 66 Bitcoin. 34
For the three months endedSeptember 30, 2022 and 2021, Data Center Hosting revenue was$8.4 million , and$11.2 million , respectively. The decrease of$2.8 million was due primarily to lower revenue share from customers due to the lower Bitcoin values in the 2022 period combined with lower customer billings due to Whinstone's participation inERCOT's energy demand response programs. Data Center 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 Rockdale 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 endedSeptember 30, 2022 , Engineering revenue was$15.8 million . There was no Engineering revenue for the three months endedSeptember 30, 2021 as such date was prior to the acquisition of the Engineering segment. 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. Costs and expenses: Cost of revenues for Mining for the three months endedSeptember 30, 2022 and 2021 was$14.7 million and$13.0 million , respectively, representing an increase of approximately$1.7 million . As a percentage of Mining revenue, cost of revenues totaled 66.5% and 24.3% for each of the three months endedSeptember 30, 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$1.6 million in cost of revenues was primarily due to the increase in mining capacity at theRockdale Facility, which requires more headcount and direct costs necessary to maintain and support the mining operations. As noted below, during the three months endedSeptember 30, 2022 and 2021, the Company earned$13.1 million and$2.5 million , respectively, in power credits to be credited against its power invoices, as a result of temporarily pausing its operations. These credits are recognized in power curtailment credits in the statements of operations, outside of cost of revenues, but significantly reduce the Company's overall cost to mine Bitcoin. When netting the power curtailment credits with the costs of revenues, the net costs as a percentage of Mining revenue were 38.8% and 24.3% for the three months endedSeptember 30, 2022 and 2021, respectively. Cost of revenues for Data Center Hosting for the three months endedSeptember 30, 2022 and 2021 was$14.2 million and$12.6 million , respectively. 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 endedSeptember 30, 2022 was$13.8 million . There were no engineering costs for the three months endedSeptember 30, 2021 as such date was prior to the acquisition of the Engineering segment. The 2022 costs consisted primarily of direct materials and labor, as well as indirect manufacturing costs. The increase in cost of revenues was primarily due to the increase in headcount to support the Company's growth combined with an increase in power costs. Selling, general and administrative expenses during the three months endedSeptember 30, 2022 and 2021 totaled$16.0 million and$40.3 million , respectively. Selling, general and administrative expenses consist of stock-based compensation, legal and professional fees and other personnel and related costs. The decrease of$24.3 million is primarily due to a decrease of$29.7 million in compensation-related expense due to the adoption of the Company's performance-based stock plan inAugust 2021 , partially offset by additional employees to support the Company's growth, an increase in audit and consulting fees of$1.9 million resulting primarily from assistance on internal control systems and procedures and information technology projects and an increase in other general operating costs, including rent, to support the Company's growth. Depreciation and amortization expenses during the three months endedSeptember 30, 2022 totaled$26.6 million , an increase of approximately$14.4 million as compared to$12.2 million for the three months endedSeptember 30, 2021 . The increase was primarily due to higher depreciation expense recognized for the Rockdale Facility and our recently acquired miners. Change in fair value of our derivative asset for the three months endedSeptember 30, 2022 and 2021, was($17.7) million and$7.4 million , respectively, and was recorded to adjust the fair value of our Power Supply Agreement, which was classified as a derivative asset and measured at fair value. 35
Power curtailment credits for the three months endedSeptember 30, 2022 and 2021, was$13.1 million and$2.5 million , respectively, and represents power sales into theERCOT marketplace through Whinstone's participation inERCOT's energy demand response programs. Realized gain on sale/exchange of Bitcoin for the three months endedSeptember 30, 2022 was$1.9 million . The realized gain or loss on sale/exchange of Bitcoin for the three months endedSeptember 30, 2021 was nominal. Gain on exchange of equipment for the three months endedSeptember 30, 2022 was$7.7 million arising from the equipment exchange agreement with a third-party Bitcoin mining company. There was no gain on exchange of equipment during the three months endedSeptember 30, 2021 . Impairment of Bitcoin for the three months endedSeptember 30, 2022 was$5.9 million arising from the decline in Bitcoin prices. There was no impairment of Bitcoin recognized during the three months endedSeptember 30, 2021 . Other income and expenses: Other income for the three months endedSeptember 30, 2022 was$0.5 million , and primarily consisted of interest and other income of$0.3 million and the unrealized gain on marketable equity securities of$0.1 million . Other expense for the three months endedSeptember 30, 2021 was$11.2 million , which primarily related to the unrealized loss recognized due to the decline in the fair value of our marketable equity securities.
Results of Operations Comparative Results for the Nine Months Ended
Revenue: For the nine months endedSeptember 30, 2022 and 2021, Mining revenue was$126.2 million , and$108.2 million , respectively. The increase of$18.0 million was due to a higher number of Bitcoin mined of 3,842 in the 2022 period, as compared to 2,458 in the 2021 period, partially offset by lower Bitcoin values in the 2022 period, averaging$32,839 per coin as compared to$44,591 per coin in the 2021 period. The number of Bitcoin mined during 2022 was significantly impacted by the Company's effective employment of its proprietary power strategy to significantly reduce overall power costs. As noted below, during the nine months endedSeptember 30, 2022 , the Company earned$21.3 million in power credits to be credited against its power invoices, as a result of temporarily pausing its operations. The power credits equate to approximately 1,160 Bitcoin, as computed by using the average daily closing BTC prices on a monthly basis. During the nine months endedSeptember 30, 2021 , the Company earned$3.7 million in power credits, or the equivalent of approximately 92 Bitcoin. For the nine months endedSeptember 30, 2022 and 2021, Data Center Hosting revenue was$27.9 million , and$14.1 million , respectively. The$13.8 million increase was primarily due to the 2021 period only containing four months of Data Center Hosting revenue versus nine for the 2022 period. Data Center 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 Rockdale 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. The Data Center Hosting segment was acquired inMay 2021 , and therefore its results of operations are only included in the Company's consolidated results of operations for four months during 2021 compared to nine in 2022. For the nine months endedSeptember 30, 2022 , Engineering revenue was$44.9 million . There was no Engineering revenue for the nine months endedSeptember 30, 2021 as such date was prior to the acquisition of the Engineering segment. 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.
36 Costs and expenses: Cost of revenues for Mining for the nine months endedSeptember 30, 2022 and 2021 was$51.8 million and$29.9 million , respectively, representing an increase of approximately$21.9 million . As a percentage of Mining revenue, cost of revenues totaled 41.0% and 27.6% for each of the nine months endedSeptember 30, 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$21.9 million in cost of revenues is primarily due to the increase in mining capacity at theRockdale Facility, which requires more headcount and direct costs necessary to maintain and support the mining operations. As noted below, during the nine months endedSeptember 30, 2022 and 2021, the Company earned$21.3 million and$3.7 million , respectively, in power credits, to be credited against its power invoices, as a result of temporarily pausing its operations. These credits are recognized in power curtailment credits in the statements of operations, outside of cost of revenues, but significantly reduce the Company's overall cost to mine Bitcoin. When netting the power curtailment credits with the costs of revenues, the net costs as a percentage of Mining revenue were 34.6% and 27.6% for the nine months endedSeptember 30, 2022 and 2021, respectively. Cost of revenues for Data Center Hosting for the nine months endedSeptember 30, 2022 and 2021 was$44.4 million and$16.3 million , respectively. The costs consisted primarily of direct power costs, with the balance primarily incurred for rent and compensation costs. Whinstone was acquired inMay 2021 , and therefore its results of operations are only included in the Company's consolidated results of operations for four months during 2021 compared to
nine in 2022. Cost of revenues for Engineering for the nine months endedSeptember 30, 2022 was$40.5 million . There were no Engineering costs for the nine months endedSeptember 30, 2021 as such date was prior to the acquisition of the Engineering segment. The 2022 costs consisted primarily of direct materials and labor, as well as indirect manufacturing costs. Acquisition-costs for the nine months endedSeptember 30, 2022 were nominal. Acquisition-related costs for the nine months endedSeptember 30, 2021 , totaled$18.9 million , and consisted of expenses incurred in connection with our acquisition of Whinstone. Selling, general and administrative expenses during the nine months endedSeptember 30, 2022 and 2021 totaled$37.5 million and$48.0 million , respectively. Selling, general and administrative expenses consist of stock-based compensation, legal and professional fees and other personnel and related costs. The decrease of$10.5 million is primarily due to a decrease of$24.8 million in compensation-related expense due to the adoption of the performance-based stock plan inAugust 2021 , partially offset by additional employees to support the Company's growth, an increase in audit and consulting fees of$3.8 million resulting primarily from assistance on internal control systems and procedures and information technology projects, an increase in insurance expense of$1.2 million , and an increase in other general operating costs, including rent, to support the Company's growth. Depreciation and amortization expenses during the nine months endedSeptember 30, 2022 totaled$61.4 million , an increase of approximately$40.6 million as compared to$20.8 million for the nine months endedSeptember 30, 2021 . The increase was primarily due to higher depreciation expense recognized for the Rockdale Facility and our recently acquired miners. Change in fair value of our derivative asset for the nine months endedSeptember 30, 2022 and 2021 was$86.9 million and$23.8 million , respectively, and was recorded to adjust the fair value of our Power Supply Agreement, which is classified as a derivative asset and measured at fair value. Power curtailment credits for the nine months endedSeptember 30, 2022 and 2021 was$21.3 million and$3.7 million , respectively, and represents power sales into theERCOT marketplace through Whinstone's participation inERCOT's energy demand response programs.
Realized gain on sale/exchange of Bitcoin for the nine months ended
Gain on exchange of equipment for the nine months endedSeptember 30, 2022 was$16.3 million arising from the equipment exchange agreement with a third-party Bitcoin mining company. There was no gain on exchange of equipment during the nine months endedSeptember 30, 2021 .
Impairment of Bitcoin for the nine months ended
Impairment of goodwill for the nine months endedSeptember 30, 2022 was$335.6 million arising from recent adverse changes in business climate, including decreases in the price of Bitcoin and increased volatility of equity markets, as evidenced by declines in the market price of the Company's securities, those of its peers, and major market indices. There was no impairment recognized during the nine months endedSeptember 30, 2021 . 37 Other income and expenses:
Other expense for the nine months endedSeptember 30, 2022 was$8.0 million and primarily consisted of the unrealized loss on marketable equity securities of$6.3 million and the realized loss on sale of marketable equity securities of$1.6 million recognized in connection with the sale of a portion of our shares ofMogo . Other income for the nine months endedSeptember 30, 2021 was$17.2 million , which primarily related to a$26.3 million realized gain on sale/exchange of long-term investment recognized in connection with the exchange of our shares ofCoinsquare Ltd. ("Coinsquare") for shares ofMogo , partially offset by$10.8 million of unrealized loss recognized on our investment in
Mogo . Non-GAAP Measures In addition to consolidatedU.S. GAAP financial measures, we consistently evaluate our use of and calculation of the non-GAAP financial measures, "Adjusted EBITDA" and Adjusted earnings per share ("Adjusted EPS"). 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, which 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. The Company determined to exclude impairments and gains or losses on sales or exchanges of Bitcoin from our calculation of Adjusted Non-GAAP EBITDA for all periods presented. Adjusted EPS is a financial measure defined as our EBITDA divided by our diluted weighted-average shares outstanding, 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 EPS is EBITDA further adjusted for certain income and expenses, which 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. The Company determined to exclude impairments and gains or losses on sales or exchanges of Bitcoin from our calculation of Adjusted Non-GAAP EPS for all periods presented. We believe Adjusted EBITDA and Adjusted EPS can be important financial measures because they allow 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. Adjusted EBITDA and Adjusted EPS are 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 and Adjusted EPS 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 and Adjusted EPS have limitations as analytical tools, and you should not consider such measures either in isolation or as substitutes for analyzing our results as reported underU.S. GAAP. 38
Reconciliations of Adjusted EBITDA and Adjusted EPS to the most comparable
Reconciliation of GAAP and Non-GAAP Financial Information
Three Months Ended Nine Months Ended
Non-GAAP Adjusted EBITDA September 30, September 30,
(in thousands) 2022 2021 2022 2021
Net income (loss) $ (36,569 ) $ (15,343 ) $ (353,774 ) $ 11,524
Interest (income) expense (348 ) (40 ) 9 (295 )
Income tax expense (benefit) (2,952 ) - (8,839 ) 3,730
Depreciation and amortization 26,559 12,207 61,366 20,791
EBITDA (13,310 ) (3,176 ) (301,238 ) 35,750
Adjustments:
Non-cash/non-recurring operating
expense:
Stock-based compensation expense 3,561 36,023 7,304 37,928
Acquisition-related costs - 552 78 18,894
Change in fair value of
derivative asset 17,749 (7,413 ) (86,865 ) (23,806 )
Change in fair value of
contingent consideration - 259 176 444
Realized loss on sale of
marketable equity securities - - 1,624 -
Unrealized loss (gain) on
marketable equity securities (142 ) 11,151 6,306 10,812
Realized gain on sale/exchange
of long-term investment - - - (26,260 )
Gain on exchange of equipment (7,667 ) - (16,281 ) -
Impairment of goodwill - - 335,648 -
Other (income) expense - 85 59 (1,425 )
Other revenue, (income) expense
items:
License fees (25 ) (25 ) (73 ) (73 )
Adjusted EBITDA $ 166 $ 37,456 $ (53,262 ) $ 52,264
Three Months Ended Nine Months Ended
Non-GAAP Adjusted EPS September 30, September 30,
2022 2021 2022 2021
Diluted net income (loss) per
share $ (0.24 ) $ (0.16 ) $ (2.64 ) $ 0.13
Interest (income) expense - - - -
Income tax expense (benefit) (0.02 ) - (0.07 ) 0.04
Depreciation and amortization 0.17 0.13 0.46 0.23
EBITDA (0.09 ) (0.03 ) (2.25 ) 0.40
Adjustments:
Non-cash/non-recurring operating
expense:
Stock-based compensation expense 0.02 0.37 0.05 0.42 Acquisition-related costs - 0.01 - 0.21 Change in fair value of derivative asset 0.12 (0.08 ) (0.65 ) (0.26 ) Change in fair value of contingent consideration - - - - Realized loss on sale of marketable equity securities - - 0.01 - Unrealized loss (gain) on marketable equity securities - 0.12 0.05 0.12 Realized gain on sale/exchange of long-term investment - - - (0.29 ) Gain on exchange of equipment (0.05 ) -
(0.12 ) - Other (income) expense - - - (0.02 ) Impairment of goodwill - - 2.51 - Other revenue, (income) expense items: License fees - - - - Adjusted EPS $ -$ 0.39 $ (0.40 ) $ 0.58 Diluted weighted average number of shares outstanding 153,895,123 96,064,036 133,894,338 89,896,374 In addition to the non-GAAP financial measures of Adjusted EBITDA and Adjusted EPS described above, we believe "Mining revenue in excess of cost of revenues, net of power curtailment credits", "Data Center Hosting revenue in excess of cost of revenues, net of power curtailment credits", "Cost of revenues - Mining, net of power curtailment credits" and "Cost of revenues - Data Center Hosting, net of power curtailment credits" are additional performance measurements that represent a key indicator of the Company's core business operations of both Bitcoin mining and Data Center Hosting. 39
We believe our ability to sell power back to the grid at market-driven spot prices, thereby reducing our operating costs, is integral to our overall strategy, specifically our power management strategy and our commitment to supporting theERCOT grid. While participation in various grid demand response programs may impact our Bitcoin production, we view this as an important part of our partnership-driven approach withERCOT and our commitment to being a good corporate citizen in our communities. We believe netting the power sales against our costs 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 operating efficiencies, from period-to-period by making such adjustments. We have allocated the benefit of the power sales to our Data Center Hosting and Mining segments based on their proportional power consumption during the periods presented. Mining revenue in excess of cost of revenues, net of power curtailment credits, Data Center Hosting revenue in excess of cost of revenues, net of power curtailment credits, Cost of revenues - Mining, net of power curtailment credits and Cost of revenues - Data Center Hosting, net of power curtailment credits are provided in addition to and should not be considered to be a substitute for, or superior to Revenue - Mining, Revenue - Data Center Hosting, Cost of revenues - Mining or Cost of revenues - Data Center Hosting as presented in our consolidated statements of operations.
Reconciliations of these measurements to the most comparable
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Mining:
Revenue $ 22,070 $ 53,590 $ 126,166 $ 108,213
Cost of revenues 14,677 13,034 51,766 29,893
Power curtailment credits (6,104 ) - (8,175 ) -
Cost of revenues, net of power
curtailment credits 8,573 13,034 43,591 29,893
Mining revenue in excess of cost
of revenues, net of power
curtailment credits $ 13,497 $ 40,556 $ 82,575 $ 78,320
Mining revenue in excess of cost
of revenues, net of power
curtailment credits as a
percentage of revenue 61.2 % 75.7 % 65.4 % 72.4 %
Data Center Hosting:
Revenue $ 8,371 $ 11,193 $ 27,899 $ 14,067
Cost of revenues 14,223 $ 12,581 $ 44,392 $ 16,317
Power curtailment credits (6,996 ) (2,507 ) (13,153 ) (3,650
Cost of revenues, net of power
curtailment credits 7,257 10,074 31,239 12,667
Data Center Hosting revenue in
excess of cost of revenues, net
of power curtailment credits $ 1,114 $ 1,119 $ (3,340 ) $ 1,400
Data Center Hosting revenue in
excess of cost of revenues, net
of power curtailment credits as
a percentage of revenue 13.3 % 10.0 % (12.0 )% 10.0 %
Total power curtailment credits
LIQUIDITY AND CAPITAL RESOURCES
AtSeptember 30, 2022 , we had working capital of approximately$369.8 million , which included cash and cash equivalents of$255.0 million . We reported net loss of$353.8 million during the nine months endedSeptember 30, 2022 . Net loss included$285.2 million in non-cash items consisting primarily of the change in fair value of our derivative asset of$86.9 million , the increase in Bitcoin held of$124.7 million , a realized gain on the sale/exchange of Bitcoin of$25.4 million , the gain on exchange of equipment of$16.3 million , and an income tax benefit of$8.7 million , offset by the impairment of goodwill of$335.6 million , impairment of Bitcoin of$132.1 million , depreciation and amortization of$61.4 million , an unrealized loss on marketable equity securities of$6.3 million , stock-based compensation expense of$7.3 million , the realized loss on sale of marketable equity securities of$1.6 million , and the amortization of our right of use asset of$2.9 million . 40 Contractual Commitments
At
Original Open
Purchase Purchase
Agreement Date (1) Commitment Commitment Deposit Balance
$ 138,506 $ 10,395 $ 53,070 Fourth Quarter 2022 October 29, 2021 56,250 (422 ) 1,609 Fourth Quarter 2022 November 22, 2021 32,550 2,969 21,938 Fourth Quarter 2022 December 10, 2021 97,650 11,865 65,814 Fourth Quarter 2022 December 24, 2021 202,860 20,118
134,904 Fourth Quarter 2022
Total $ 527,816 $ 44,925 $ 277,335
(1) Pursuant to the Company's agreements with Bitmain, among other provisions, 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 , pursuant to whichCoinmint agreed to provide up to approximately 9.5 megawatts of electrical power and to perform all maintenance necessary to operate the Company's miners deployed at the Coinmint Facility. In exchange,Coinmint was reimbursed for direct production expenses and received a performance fee based on the net Bitcoin generated by the Company's miners deployed at theCoinmint Facility. The amount of electrical power supplied to the Company's miners at the Coinmint Facility was subsequently increased to accommodate the Company's expanding miner fleet. During the nine months endedSeptember 30, 2022 , the Company elected not to renew its co-location mining services agreement withCoinmint , which was, therefore, terminated automatically by its terms as of
July 8, 2022 . Miners As ofSeptember 30, 2022 , the Company had outstanding executed purchase agreements for the purchase of miners from Bitmain for a total of approximately 12,097 new model S19j Pro miners and 19,947 new model S19XP miners, scheduled to be shipped throughDecember 2022 . Pursuant to these agreements, approximately$44.9 million remains payable to Bitmain, subject to future adjustments as provided in the contracts, in installments in advance of shipment of the miners, which is scheduled to occur monthly throughDecember 2022 .
Development of the
During the nine months endedSeptember 30, 2022 , the Company announced that it has initiated a large-scale development to expand its Bitcoin mining and data center hosting capabilities inNavarro County, Texas with the acquisition of a 265-acre site where the anticipated one-gigawatt Corsicana Facility is being constructed. The Company received approval fromERCOT for the entire one-gigawatt capacity. The initial phase of the development of theCorsicana Facility involves the construction on the 265-acre site of 400 megawatts of immersion-cooled Bitcoin mining and data center hosting infrastructure spread across multiple buildings, as well as a high-voltage power substation and transmission facilities to supply power to the facility. Construction of the substation and the data centers is expected to be carried out concurrently, with self-mining and data center hosting operations expected to commence by the fourth quarter of 2023, following the commissioning of the substation, which is expected to be completed in summer 2023. This first phase of the development of the Corsicana Facility includes land acquisition, site preparation, substation development, and transmission construction, along with construction of ancillary buildings and four buildings utilizing the Company's immersion-cooling infrastructure and technology. The Company estimates that the total cost of the first phase of the development will be approximately$333 million , which is scheduled to be invested over the remainder of 2022, 2023, and the first quarter of 2024. ThroughSeptember 30, 2022 , the Company has incurred costs of approximately$30 million related to the development of the Corsicana Facility. The acquisition costs include$10 million for land,$15 million of initial developments costs and a$5 million deposit for future power usage. The Company expects to incur costs of approximately$74.0 million over the remaining period of 2022, approximately$223.9 million during 2023, and approximately$9.5 million during the first quarter of 2024. 41 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 Data Center 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. 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, Data Center Hosting operations or Engineering operations when needed or secure additional sources of funding, it may be necessary to adjust our strategy or explore other strategic alternatives.
At-the-Market Equity Offering
The Company entered into the Sales Agreement with the Sales Agents datedMarch 31, 2022 , 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 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 ofSeptember 30, 2022 , the Company had received net proceeds of approximately$298.4 million (after deducting$6.5 million in commissions and expenses) on sales of 37.1 million shares of common stock under the Sales Agreement at a weighted average price of$8.23 per share. Legal Proceedings The Company is a party in several contractual lawsuits and has also been named a defendant in several legacy 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 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. 42
Whinstone Related Party Transactions
Included in construction in progress as ofSeptember 30, 2022 , are deposit payments of approximately$0.1 million that relate to a Whinstone initiative for providing certain on-site temporary housing for stakeholders, including partners, analysts, stockholders, etc. The initiative arose as a result of limited accommodations for visitors in theRockdale, TX , area, which is generally a remote area. The transaction as contemplated would involve Whinstone developing the temporary housing on land owned byLyle Theriot (indirectly, through a limited liability company).Mr. Theriot is part of the management team at Whinstone and is considered a related party of Whinstone. The Company is evaluating certain related party implications of the initiative on an ongoing basis, underU.S. GAAP and other applicable regulatory reporting requirements including, but not limited to, the Sarbanes-Oxley Act of 2002. As part of, and contingent upon the closing of the Whinstone Acquisition inMay 2021 , employment agreements were entered into with the founding management team of Whinstone. The agreements contain customary terms and conditions covering compensation, benefits, duties and services and other terms and conditions. The agreements provide that services shall initially be provided in theRockdale, Texas area. The agreements provide that the employee be reimbursed for reasonable lodging, housing and utilities, travel, and food in area of project sites, and costs of owning and operating an automobile. Such reimbursed costs have not been material. During the nine months endedSeptember 30, 2022 , a total of$0.7 million was paid in expenses to or on behalf of the Whinstone management team, which included the deposit payments discussed above, and including reimbursement of expenses previously determined to qualify as reimbursable expenses in accordance with the respective employment agreements. During the period from the Whinstone acquisition toSeptember 30, 2021 , a total of$0.4 million was paid in expenses to or on behalf of the Whinstone management team, including reimbursement of expenses determined to qualify as reimbursable expenses in accordance with the respective employment agreements and amounts for reimbursement of ongoing business expenses. Additionally, duringApril 2022 Whinstone acquired a 2022 used SUV at a cost of$0.1 million to be used for transport in the local area as well as being available to the Whinstone management team under their employment agreements. Operating Activities Net cash used in operating activities was$0.7 million during the nine months endedSeptember 30, 2022 . Cash was used in operations by net loss of$353.8 million , less non-cash items of$285.2 million in non-cash items consisting primarily of the change in fair value of our derivative asset of$86.9 million , the increase in Bitcoin held of$124.7 million , a realized gain on the sale/exchange of Bitcoin of$25.4 million , the gain on exchange of equipment of$16.3 million , and an income tax benefit of$8.8 million , offset by the impairment of goodwill of$335.6 million , impairment of Bitcoin of$132.1 million , depreciation and amortization of$61.4 million , an unrealized loss on marketable equity securities of$6.3 million , stock-based compensation expense of$7.3 million , the realized loss on sale of marketable equity securities of$1.6 million , and the amortization of our right of use asset of$2.9 million . The change in assets and liabilities of$67.9 million consisted primarily of proceeds from sale of Bitcoin of$52.5 million , change in fair value of future power credits of$43.9 million , and an increase in billings in excess of costs and estimated earnings of$6.0 million , partially offset by decreased accounts payable and accrued expenses of$10.0 million , increased prepaid expenses and other current assets of$15.0 million , increased costs and estimated earnings in excess of billings of$5.3 million , decreased deferred revenue of$1.6 million , increased accounts receivable of$2.0 million , and decreased lease liability of$2.7 million , and increased customer deposits of$2.1 million . Net cash used in operating activities was$60.9 million during the nine months endedSeptember 30, 2021 . Cash was generated from operations by income of$11.5 million , less non-cash items of$66.0 million , consisting primarily of a realized gain on the sale of marketable equity securities of$26.3 million , the change in fair value of our derivative asset of$23.8 million and the increase in Bitcoin held of$108.1 million , offset by stock-based compensation expense of$37.9 million , the impairment of Bitcoin of$17.5 million , depreciation and amortization of$20.8 million , an unrealized loss on marketable securities of$10.8 million , deferred income tax expense of$3.7 million , the issuance of common stock warrants of$1.2 million and the change in fair value of contingent consideration of$0.4 million , net of other immaterial items. The change in assets and liabilities of$6.4 million consisted primarily of increased customer deposits of$6.1 million , increased accounts receivable of$2.6 million , decreased prepaid expenses and other current assets of$1.2 million , increased accounts payable and accrued expenses of$4.5 million , change in fair value of future power credits of$0.4 million , and decreased deferred revenue of$12.8 million . 43 Investing Activities Net cash used in investing activities during the nine months endedSeptember 30, 2022 was$329.4 million , primarily consisting of deposits on equipment of$194.9 million , purchases of property and equipment of$129.7 million and cash paid for other deposits of$5.5 million , partially offset by proceeds received of$0.7 million from the sale of our shares ofMogo . Net cash used in investing activities during the nine months endedSeptember 30, 2021 was$221.1 million , primarily consisting of deposits on equipment of$103.2 million , our acquisition of Whinstone of$40.9 million , net and purchases of property and equipment of$78.9 million , offset by proceeds of$1.8 million received in connection with the exchange of our shares ofCoinsquare Ltd. for shares ofMogo . Financing Activities Net cash provided by financing activities was$272.8 million during the nine months endedSeptember 30, 2022 , which consisted of net proceeds from the issuance of our common stock in connection with our 2022 ATM Offering of$298.4 million , partially offset by the shares of common stock withheld to satisfy employee taxes of$9.9 million in connection with the settlement of vested equity awards granted under our 2019 Equity Plan and the payment of contingent consideration liability of$15.7 million . Net cash provided by financing activities was$116.5 million during the nine months endedSeptember 30, 2021 , which consisted of net proceeds from the issuance of our common stock in connection with our ATM Offerings of$117.5 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$1.8 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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