Riot Platforms, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (this “MD&A”) should be read in conjunction with our unaudited condensed 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 ended December 31, 2022, as included in our 2022 Annual Report. This MD&A contains statements of management’s beliefs, expectations and assumptions regarding our future business, and any statements other than statements of historical fact are “forward-looking statements” within the meaning of the PSLRA, which are made in reliance of the safe harbor provisions of Section 27A of the Securities Act, Section 21E of the Exchange Act, and the PSLRA. Such statements express management’s beliefs, opinions, projections and expectations regarding future events and circumstances, based on information available to management as of the date of this Quarterly Report, and are subject to risks and uncertainties, 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 this MD&A and elsewhere in this Quarterly Report. Amounts are stated in thousands of U.S. Dollars except for share, per share and miner amounts. Business Overview: We are a vertically integrated Bitcoin mining company principally engaged in enhancing our capabilities to mine Bitcoin in support of the Bitcoin blockchain. We also provide comprehensive and critical infrastructure for institutional-scale hosted clients to mine Bitcoin at our Rockdale Facility. Currently, the Rockdale Facility provides 700 MW in total developed capacity for our Bitcoin Mining and Data Center Hosting services for institutional-scale hosted clients. Our Rockdale Facility is believed to be the largest Bitcoin mining facility in North America, as measured by developed capacity, and we are currently evaluating further growing its capacity. Additionally, we are developing the Corsicana Facility, a second large-scale Bitcoin mining data center facility, which, upon completion, is expected to have approximately one gigawatt of capacity available for our own Bitcoin Mining and Data Center Hosting services for institutional-scale hosted clients. ​ We operate in an environment which is constantly 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 investment. Industry Trends During 2022, we observed several companies in the Bitcoin ecosystem experience significant challenges and initiate bankruptcy proceedings due to the significant decline in the price of Bitcoin and other national and global macroeconomic factors. We anticipate this trend will likely continue as companies attempt to shift their business models to operate on significantly compressed margins. The dramatic increase in the price of Bitcoin observed in the market during prior years caused many companies to over-leverage themselves, thus operating in an unsustainable way given the recent variability in the price of Bitcoin. Riot chose to refrain from engaging in debt-financing activities during this period and, as a result, has not been subject to the significant debt-service shortfalls some of our competitors are experiencing. Despite such challenges in the ecosystem, Riot continues to focus on building long-term stockholder value by taking strategic action to vertically integrate its business, expanding the Rockdale Facility and developing the Corsicana Facility. Management believes this focus will positively affect each of Riot’s three business segments by providing more capacity for its Bitcoin Mining and Data Center Hosting operations, and by capitalizing on supply chain efficiencies garnered through our Engineering segment. As we grow our business, we continue to focus on deploying our efficient Bitcoin mining fleet, at scale, while realizing the benefits of being an owner and operator of our Bitcoin Mining and Data Center Hosting facilities. We anticipate companies in our industry will continue to experience challenges, and that 2023 will continue to be a period of consolidation in the Bitcoin mining industry, and, given our relative position, liquidity and absence of long-term debt, we believe we are positioned in the competitive landscape to benefit from such 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. ​ 23 Table of Contents The recent shutdowns of certain digital asset exchanges and trading platforms due to fraud or business failure, has negatively impacted confidence in the digital asset industry as a whole and led to increased oversight and scrutiny on the industry. We did not have any exposure to any digital asset lenders or exchanges who have declared bankruptcy or have been suspended. We only hold Bitcoin that we have mined and do not sell or redeem any Bitcoin for any other parties. Our Bitcoin is held in cold storage wallets by a well-known third-party digital asset-focused custodian. We also sell our Bitcoin using our custodian’s services. ​ In 2023, the banking industry and financial services sector experienced disruptions and instability. In March 2023, Silvergate Capital Corporation, the holding company for Silvergate Bank (“Silvergate Bank”), which was primarily focused on the digital asset industry, announced its intent to wind down operations and voluntarily liquidate its holdings. Also in March, Silicon Valley Bank (“Silicon Valley Bank”) and Signature Bank (“Signature Bank”) both closed and the Federal Deposit Insurance Corporation (“FDIC”) was appointed receiver following their closures and transferred substantially all assets of the former banks to newly created, FDIC-operated bridge banks in an action to protect all depositors of the banks. In May 2023, First Republic Bank was closed and the FDIC sold substantially all of First Republic Bank’s assets to JP Morgan Chase & Co. ​ Although we maintained certain operating accounts with Signature Bank prior to its closure, we have since transferred all of our deposits previously held with the bank to other banking institutions. We did not lose access to our accounts or experience interruptions in banking services, and suffered no losses with respect to its deposits at Signature Bank as a result of the bank’s closure. We did not have any banking relationships with Silicon Valley Bank, Silvergate Bank, or First Republic Bank, and currently hold our cash and cash equivalents at multiple banking institutions. Although we did not suffer any losses, we continue to monitor for updates to mitigate any future impacts we may be subject to as a result of the instability of the banking industry and financial services sector. ​ Bitcoin Mining We own and operate one of the largest Bitcoin Mining operations in North America. During the six months ended June 30, 2023, we continued to deploy miners at our Rockdale Facility and continued development activities at the Corsicana Facility, with the objective of increasing our operational efficiency and performance in the future. ​ As of June 30, 2023, our Bitcoin Mining business segment operated 95,904 miners, with a hash rate capacity of 10.7 EH/s, which excludes 17,040 miners currently offline as a result of infrastructure damage experienced during severe winter storms in December 2022 at our Rockdale Facility in central Texas. Repairs to the Rockdale Facility have been ongoing and we plan to bring our hash rate capacity back online in the second half of 2023. During the six months ended June 30, 2023, we mined 3,890 Bitcoin, which represented an increase of 38.9% over the 2,800 Bitcoin we mined in the six months ended June 30, 2022. We anticipate achieving a total self-mining hash rate capacity of 12.5 EH/s in the second half of 2023. In June 2023, we entered into a purchase agreement with MicroBT to acquire 8,320 M56S+ model miners and 24,960 M56S++ model miners for a total purchase price of approximately $162.9 million, as well as option to purchase up to an additional 66,560 additional M56S++ miners, on the same terms as the initial purchase order, through December 31, 2024. Delivery of the miners is expected to begin in December 2023, with all miners expected to be received and deployed by mid-2024. Upon full deployment of the 33,280 miners, we anticipate achieving a total self-mining hash rate capacity of 20.1 EH/s. The purchase agreement also provides us the option to purchase up to an additional 66,560 additional M56S++ miners on the same terms as the initial purchase order through December 31, 2024. For the six months ended June 30, 2023, Bitcoin Mining revenue was approximately $97.8 million. ​ Data Center Hosting Following our acquisition of Whinstone, we commenced an expansion of our Rockdale Facility to 700 MW, from its initial 300 MW of developed capacity at the time of acquisition and, as of June 30, 2023, the 400 MW expansion was completed. The expansion of our Rockdale Facility has provided capacity to enable us to deploy our current fleet of miners in a self-hosted facility, while allowing us to continue to operate and grow our Data Center Hosting business segment. We believe deploying our miners at the expanded Rockdale Facility offers many advantages for our Bitcoin mining operations, including allowing us to operate our miners without incurring third-party colocation services fees and to do so at the low fixed energy costs available to the Rockdale Facility under its long-term power supply agreement. 24 Table of Contents 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 six months ended June 30, 2023, Data Center Hosting revenue was approximately $16.7 million. Engineering Our Engineering business segment designs and manufacturers power distribution equipment and custom engineered electrical products that provide us with the ability to vertically integrate many of the critical electrical components and engineering services necessary for our Rockdale Facility expansion and to reduce our execution and counter-party risk in ongoing and future expansion projects. Engineering and other specialized talent employed in our Engineering business segment also allows us to continue to explore new methods to optimize and develop a best-in-class Bitcoin mining operation and has been instrumental in the development of our industrial-scale immersion-cooled Bitcoin mining hardware. Our Engineering business segment also provides electricity distribution product design, manufacture, and installation services primarily focused on large-scale commercial and governmental customers and serves a broad scope of clients across a wide range of markets including data center, power generation, utility, water, industrial, and alternative energy. Products are custom built to client and industry specifications. Additionally, we utilize an in-house field service and repair department. 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. For the six months ended June 30, 2023, Engineering revenue was approximately $35.5 million. 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 development of our new Corsicana 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 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. ​ 25 Table of Contents Summary of Bitcoin Mining Results The following tables presents additional information about our Bitcoin Mining activities, including Bitcoin production and sales of the Bitcoin mined: ​ ​ ​ ​ ​ ​ ​ ​ ​ Quantity ​ Amounts Balance as of January 1, 2023 6,974 ​ $ 109,420 Revenue recognized from Bitcoin mined 3,890 ​ 97,765 Proceeds from sale of Bitcoin (3,575) ​ (89,162) Exchange of Bitcoin for employee compensation (24) ​ (585) Realized gain on sale of Bitcoin — ​ 33,603 Impairment of Bitcoin — ​ (10,110) Balance as of June 30, 2023 7,265 ​ $ 140,931 ​ ​ ​ ​ ​ ​ ​ ​ ​ Quantity ​ Amounts Balance as of January 1, 2022 4,884 ​ $ 150,593 Revenue recognized from Bitcoin mined 2,800 ​ 104,096 Proceeds from sale of Bitcoin (1,000) ​ (33,116) Exchange of Bitcoin for employee compensation (31) ​ (1,362) Realized gain on sale of Bitcoin — ​ 24,925 Impairment of Bitcoin — ​ (127,289) Balance as of June 30, 2022 6,653 ​ $ 117,847 ​ Results of Operations Comparative Results for the three months ended June 30, 2023 and 2022: Revenues Total revenue for the three months ended June 30, 2023 and 2022, was $76.7 million and $72.9 million, respectively, and consisted of our Bitcoin Mining revenue, Data Center Hosting revenue, Engineering revenue, and other revenue. For the three months ended June 30, 2023 and 2022, Bitcoin Mining revenue was $49.7 million, and $46.2 million, respectively. The increase of $3.6 million was primarily due to an increase of 380 Bitcoin mined in the 2023 period as compared to the 2022 period, partially offset by lower Bitcoin values in the 2023 period, averaging $28,024 per coin, as compared to $33,083 per for the 2022 period. Additionally, the Company continued its effective employment of its proprietary power strategy to significantly reduce overall power costs. As noted below, during the three months ended June 30, 2023 and 2022, the Company earned $13.5 million and $5.7 million, respectively, in power credits, which were received in cash or credited against its power invoices, as a result of temporarily pausing its operations. The power credits equate to approximately 481 Bitcoin and 138 Bitcoin, respectively, as computed using the average daily Bitcoin prices for the applicable period. For the three months ended June 30, 2023 and 2022, Data Center Hosting revenue was $7.7 million, and $9.8 million, respectively. The decrease of $2.2 million was primarily due to fewer hosting customers and lower Bitcoin values during the 2023 period, partially offset by increased revenue share from hosting customers due to the increased Bitcoin production in the 2023 period, as noted above. For the three months ended June 30, 2023 and 2022, Engineering revenue was $19.3 million and $16.9 million, respectively. The increase of $2.4 million was primarily attributable to an increase in data center development across the country. Our custom electrical products such as switchgear and power distribution centers are used as important components in data center development and there has been increased demand for these products due to the continued increase in data center construction by developers. Costs and expenses Cost of revenues for Bitcoin Mining for the three months ended June 30, 2023 and 2022, was $23.6 million and $18.0 million, respectively, an increase of approximately $5.7 million. As a percentage of Bitcoin Mining revenue, cost of revenues totaled 47.5% and 39.0% for the three months ended June 30, 2023 and 2022, respectively. Cost of revenues consists primarily of direct production costs of Bitcoin mining operations, including electricity, labor, and insurance, but excluding depreciation and amortization, which are separately stated. The increase was primarily due to the increase in Bitcoin mining capacity at the Rockdale Facility, which requires more headcount and direct costs necessary to maintain and support the Bitcoin mining operations. As noted below, during the three months ended June 30, 2023 and 2022, the Company earned $13.5 million and $5.7 million, respectively, in power credits 26 Table of Contents 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 Bitcoin Mining revenue were 29.9% and 34.2% for the three months ended June 30, 2023 and 2022, respectively. Cost of revenues for Data Center Hosting for the three months ended June 30, 2023 and 2022, was $22.1 million and $15.2 million, respectively, an increase of approximately $7.0 million. The costs consisted primarily of direct power costs, with the balance primarily incurred for rent and compensation costs. The increase was primarily attributable to the significant increase in size of our Rockdale Facility over the period, which has more than doubled since 2021. Cost of revenues for Engineering for the three months ended June 30, 2023 and 2022, was $18.2 million and $15.2 million, respectively, an increase of approximately $3.0 million. The costs consisted primarily of direct materials and labor, as well as indirect manufacturing costs. The increase was primarily due to an increase in materials purchased, as well as additional labor required to support increased demand for our custom electric products from data center developers. Increased competition for direct materials due to supply chain constraints contributed to additional costs, as well as inflationary pressure for labor in manufacturing. ​ Selling, general and administrative expenses for the three months ended June 30, 2023 and 2022, were $19.8 million and $10.7 million, respectively, an increase of approximately $9.1 million. Selling, general and administrative expenses consist of stock-based compensation, legal and professional fees and other personnel and related costs. The increase was primarily due to increases in stock compensation expenses of $2.7 million and compensation expenses of $3.0 million as a result of hiring additional employees to support the Company’s ongoing growth, increased professional fees of $1.9 million primarily related to public company compliance and information technology projects, and increases of $1.5 million in other general operating costs to support the Company’s growth. Depreciation and amortization for the three months ended June 30, 2023 and 2022, was $66.2 million and $20.6 million, respectively, an increase of approximately $45.6 million. The increase was primarily due to higher depreciation expense recognized for the Rockdale Facility and significant increase in number of recently acquired miners. The increase in fair value of our derivative asset for the three months ended June 30, 2023 and 2022, was $13.1 million and $60.9 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. The increases in fair value were due to increases over the applicable period in future power prices. Power curtailment credits for the three months ended June 30, 2023 and 2022, were $13.5 million and $5.7 million, respectively, of power sales into the ERCOT marketplace through the Company’s participation in ERCOT’s energy demand response programs. The amount of these credits varies from period to period depending on various factors impacting the supply of power to and the demand on the power grid, including weather. Realized gains on the sale of Bitcoin for the three months ended June 30, 2023 and 2022, were $19.8 million and $15.3 million, respectively. The increase was primarily attributable to an increase of 800 Bitcoin sold in the 2023 period as compared to the 2022 period, partially offset by decreased Bitcoin values in the 2023 period as compared to the 2022 period. Impairment of Bitcoin for the three months ended June 30, 2023 and 2022, was $5.6 million and $101.4 million, respectively, arising from declines in Bitcoin prices during the periods. Other income (expense) Other income for the three months ended June 30, 2023, was $4.9 million, which primarily consisted of interest income, net of interest expense. The increase in interest income was primarily due to the increase in short-term interest rates combined with an increase in our average cash balance. Other expense for the three months ended June 30, 2022 was $6.5 million, which was primarily related to realized and unrealized losses on marketable equity securities. Results of Operations Comparative Results for the six months ended June 30, 2023 and 2022: Revenues Total revenue for the six months ended June 30, 2023 and 2022 was $150.0 million and $152.7 million, respectively, and consisted of our Bitcoin Mining revenue, Data Center Hosting revenue, Engineering revenue, and other revenue. 27 Table of Contents For the six months ended June 30, 2023 and 2022, Bitcoin Mining revenue was $97.8 million, and $104.1 million, respectively. The decrease of $6.3 million was primarily due to lower Bitcoin values in the 2023 period, averaging $25,132 per coin, as compared to $37,177 for the 2022 period. This was partially offset by an increase of 1,090 Bitcoin mined in the 2023 period as compared to the 2022 period. Additionally, the Company continued its effective employment of its proprietary power strategy to significantly reduce overall power costs. As noted below, during the six months ended June 30, 2023, the Company earned $16.5 million in power credits, which were received in cash or credited against its power invoices, as a result of temporarily pausing its operations. The power credits equate to approximately 658 Bitcoin, as computed using the average daily Bitcoin prices for the 2023 period. During the six months ended June 30, 2022, the Company earned $8.3 million in power credits, or the equivalent of approximately 222 Bitcoin. For the six months ended June 30, 2023 and 2022, Data Center Hosting revenue was $16.7 million, and $19.5 million, respectively. The decrease of $2.8 million was primarily due to lower revenue share from customers due to the lower Bitcoin values in the 2023 period, as noted above, combined with hosting fewer customers during 2023. For the six months ended June 30, 2023 and 2022, Engineering revenue was $35.5 million and $29.1 million, respectively. The increase of $6.4 million was primarily attributable to an increase in data center development across the country. Our custom electrical products such as switchgear and power distribution centers are used as important components in data center development and there has been increased demand for these products due to the continued increase in data center construction by developers. Costs and expenses Cost of revenues for Bitcoin Mining for the six months ended June 30, 2023 and 2022, was $45.5 million and $37.1 million, respectively, an increase of approximately $8.5 million. As a percentage of Bitcoin Mining revenue, cost of revenues totaled 46.6% and 35.6% for the six months ended June 30, 2023 and 2022, respectively. Cost of revenues consists primarily of direct production costs of Bitcoin mining operations, including electricity, labor, and insurance, but excluding depreciation and amortization, which are separately stated. The increase was primarily due to the increase in Bitcoin mining capacity at the Rockdale Facility, which requires more headcount and direct costs necessary to maintain and support the Bitcoin mining operations. As noted below, during the six months ended June 30, 2023 and 2022, the Company earned $16.5 million and $8.3 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 Bitcoin Mining revenue were 35.8% and 32.9% for the six months ended June 30, 2023 and 2022, respectively. Cost of revenues for Data Center Hosting for the six months ended June 30, 2023 and 2022, was $47.8 million and $30.2 million, respectively, an increase of approximately $17.6 million. The costs consisted primarily of direct power costs, with the balance primarily incurred for rent and compensation costs. The increase was primarily attributable to the significant increase in size of our Rockdale Facility over the period, which has more than doubled since 2021. Cost of revenues for Engineering for the six months ended June 30, 2023 and 2022, was $33.7 million and $26.7 million, respectively, an increase of approximately $7.0 million. The costs consisted primarily of direct materials and labor, as well as indirect manufacturing costs. The increase was primarily due to an increase in materials purchased, as well as additional labor required to support increased demand for our custom electric products from data center developers. Increased competition for direct materials due to supply chain constraints contributed to additional costs, as well as inflationary pressure for labor in manufacturing. ​ Selling, general and administrative expenses for the six months ended June 30, 2023 and 2022, were $32.5 million and $21.5 million, respectively, an increase of approximately $11.0 million. Selling, general and administrative expenses consist of stock-based compensation, legal and professional fees and other personnel and related costs. The increase was primarily due to increases in compensation expenses of $5.7 million as a result of hiring additional employees to support the Company’s ongoing growth, increased professional fees of $3.9 million primarily related to public company compliance and information technology projects, and increases of $4.0 million in other general operating costs to support the Company’s growth, partially offset by decreased stock compensation expenses of $2.6 million, primarily attributable to increased forfeitures of awards in the 2023 period as compared to the 2022 period. Depreciation and amortization expense for the six months ended June 30, 2023 and 2022, was $125.5 million and $34.8 million, respectively, an increase of approximately $90.7 million. The increase was primarily due to higher depreciation expense recognized for the Rockdale Facility and significant increase in number of recently acquired miners. 28 Table of Contents The increase in fair value of our derivative asset for the six months ended June 30, 2023 and 2022, was $7.3 million and $104.6 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. The increases in fair value were due to increases over the applicable period in future power prices. Power curtailment credits for the six months ended June 30, 2023 and 2022, was $16.5 million and $8.3 million, respectively, and represent power sales into the ERCOT marketplace through the Company’s participation in ERCOT’s energy demand response programs. The amount of these credits varies from period to period depending on various factors impacting the supply of power to and the demand on the power grid, including weather. The realized gain on sale of Bitcoin for the six months ended June 30, 2023 and 2022 was $33.6 million and $24.9 million, respectively. The increase was primarily attributable to an increase of 2,575 more Bitcoin sold in the 2023 period as compared to the 2022 period, partially offset by decreased Bitcoin values in the 2023 period as compared to the 2022 period. Casualty-related losses for the three and six months ended June 30, 2023, was $1.5 million and was attributable to the damage incurred at the Rockdale Facility as a result of severe winter storms in Texas. There were no casualty-related losses incurred for the six months ended June 30, 2022. Impairment of Bitcoin for the six months ended June 30, 2023 and 2022, was $10.1 million and $127.3 million, respectively, arising from declines in Bitcoin prices during the periods. Other income (expense) Other expense for the six months ended June 30, 2023, was $1.1 million, which primarily consisted of interest income, net of interest expense. Other expense for the six months ended June 30, 2022 was $8.5 million, which was primarily related to realized and unrealized losses on marketable equity securities. Non-GAAP Measures In addition to financial measures presented under GAAP, we consistently evaluate our use of and calculation of non-GAAP financial measures such as “Adjusted EBITDA.” EBITDA is computed as net income before interest, taxes, depreciation, and amortization. Adjusted EBITDA is a financial measure defined as EBITDA further adjusted to eliminate the effects of certain non-cash and/or non-recurring items that do not reflect our ongoing strategic business operations, 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. 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. Additionally, Adjusted EBITDA is used as a performance metric for share-based compensation. Adjusted EBITDA is provided in addition to, and should not be considered to be a substitute for, or superior to, net income, the most comparable measure under GAAP to Adjusted EBITDA. 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 with 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 this measure either in isolation or as a substitute for analyzing our results as reported under GAAP. ​ 29 Table of Contents The following table reconciles Adjusted EBITDA to Net income (loss) , the most comparable GAAP financial measure: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Six Months Ended ​ ​ June 30, ​ June 30, ​ 2023 2022 2023 2022 Net income (loss) ​ $ (27,687) ​ $ (353,559) ​ $ (83,375) ​ $ (316,981) Interest (income) expense ​ (4,843) ​ — ​ (1,013) ​ 357 Income tax expense (benefit) ​ 112 ​ (6,199) ​ (4,857) ​ (5,887) Depreciation and amortization ​ 66,162 ​ 20,562 ​ 125,502 ​ 34,807 EBITDA ​ 33,744 ​ (339,196) ​ 36,257 ​ (287,704) ​ ​ ​ ​ ​ Adjustments: ​ ​ ​ ​ Stock-based compensation expense ​ 3,429 ​ 701 ​ 1,133 ​ 3,743 Acquisition-related costs ​ — ​ — ​ — ​ 78 Change in fair value of derivative asset ​ (13,109) ​ (60,931) ​ (7,331) ​ (104,614) Change in fair value of contingent consideration ​ — ​ — ​ — ​ 176 Realized loss on sale of marketable equity securities ​ ​ — ​ ​ 1,624 ​ ​ — ​ ​ 1,624 Unrealized (gain) loss on marketable equity securities ​ — ​ 4,837 ​ — ​ 6,448 Gain (loss) on sale/exchange of equipment ​ 30 ​ (8,614) ​ 30 ​ (8,614) Casualty-related charges (recoveries), net ​ ​ — ​ ​ — ​ ​ 1,526 ​ ​ — Impairment of goodwill ​ ​ — ​ ​ 335,648 ​ ​ — ​ ​ 335,648 Other (income) expense ​ (65) ​ 59 ​ (65) ​ 59 License fees ​ (24) ​ (24) ​ (48) ​ (48) Adjusted EBITDA ​ $ 24,005 ​ $ (65,896) ​ $ 31,502 ​ $ (53,204) ​ In addition to Adjusted EBITDA, we believe “Bitcoin 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 – Bitcoin Mining, net of power curtailment credits” and “Cost of revenues – Data Center Hosting, net of power curtailment credits” are additional non-GAAP performance measurements that represent a key indicator of the Company’s core business operations of both Bitcoin mining and Data Center Hosting. ​ We believe our ability to offer 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 the ERCOT 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 with ERCOT and our commitment to being a good corporate citizen in our communities. We also 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 Bitcoin Mining segments based on their proportional power consumption during the periods presented. Bitcoin 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 – Bitcoin 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 – Bitcoin Mining, Revenue – Data Center Hosting, Cost of revenues – Bitcoin Mining or Cost of revenues – Data Center Hosting as presented in our consolidated statements of operations. ​ 30 Table of Contents The following table presents reconciliations of these measurements to the most comparable GAAP financial measures: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Six Months Ended ​ ​ June 30, ​ June 30, ​ 2023 2022 2023 2022 ​ Bitcoin Mining ​ ​ ​ ​ ​ Revenue ​ $ 49,742 ​ $ 46,151 ​ $ 97,765 ​ $ 104,096 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cost of revenues ​ 23,647 ​ 17,995 ​ 45,546 ​ 37,089 ​ Power curtailment credits ​ (8,755) ​ (2,209) ​ (10,589) ​ (2,820) ​ Cost of revenues, net of power curtailment credits ​ 14,892 ​ 15,786 ​ 34,957 ​ 34,269 ​ Bitcoin mining revenue in excess of cost of revenues, net of power curtailment credits ​ $ 34,850 ​ $ 30,365 ​ $ 62,808 ​ $ 69,827 ​ Bitcoin mining revenue in excess of cost of revenues, net of power curtailment credits as a percentage of revenue ​ 70.1% ​ 65.8% ​ 64.2% ​ 67.1% ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Data Center Hosting ​ ​ ​ ​ ​ Revenue ​ $ 7,661 ​ $ 9,834 ​ $ 16,703 ​ $ 19,528 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cost of revenues ​ 22,134 ​ $ 15,184 ​ $ 47,794 ​ $ 30,169 ​ Power curtailment credits ​ (4,715) ​ (3,497) ​ (5,956) ​ (5,438) ​ Cost of revenues, net of power curtailment credits ​ 17,419 ​ 11,687 ​ 41,838 ​ 24,731 ​ Data Center Hosting revenue in excess of cost of revenues, net of power curtailment credits ​ $ (9,758) ​ $ (1,853) ​ $ (25,135) ​ $ (5,203) ​ Data Center Hosting revenue in excess of cost of revenues, net of power curtailment credits as a percentage of revenue ​ (127.4)% ​ (18.8)% ​ (150.5)% ​ (26.6)% ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total power curtailment credits ​ $ (13,470) ​ $ (5,706) ​ $ (16,545) ​ $ (8,258) ​ ​ LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2023, we had working capital of approximately $408.4 million, which included cash and cash equivalents of $289.2 million. We reported a net loss of $83.4 million during the six months ended June 30, 2023, which included $4.4 million in non-cash expenses, primarily consisting of depreciation and amortization of $125.5 million and impairments of Bitcoin of $10.1 million, partially offset by Bitcoin Mining revenue of $97.8 million, gains on the sale of Bitcoin of $33.6 million, and an increase in the fair value of our derivative asset of $7.3 million, and an income tax benefit of $4.9 million. During the six months ended June 30, 2023, the Company sold 3,575 Bitcoin for proceeds of approximately $89.2 million. The Company monitors its balance sheet on an ongoing basis and evaluates the level of Bitcoin retained from monthly production in consideration of the cash requirements and its ongoing operations and expansion. During the six months ended June 30, 2023, we issued 15,877,000 shares of common stock, at a weighted average price of $11.87 per share, for net proceeds of approximately $184.7 million and during July 2023, issued 570,645 shares of common stock, at a weighted average price of $11.78 per share, for net proceeds of approximately $6.6 million. We believe our current financial position and operations give us the ability to meet cash requirements and plans in the short-term and long-term. Miners As of December 31, 2022, the Company had outstanding executed purchase agreements for the purchase of miners from Bitmain for a total of 5,130 S19 series miners, which were received in January 2023. In June 2023, we entered into a purchase agreement with MicroBT to acquire 8,320 M56S+ model miners and 24,960 M56S++ model miners for a total purchase price of approximately $162.9 million. Delivery of the miners is expected to begin in December 2023, with all miners expected to be received and deployed by mid-2024. Upon full deployment of the 33,280 miners, we anticipate 31 Table of Contents achieving a total self-mining hash rate capacity of 20.1 EH/s. The purchase agreement also provides us the option to purchase up to an additional 66,560 additional M56S++ miners on the same terms as the original purchase through December 31, 2024. Development of the Corsicana Facility Data Center In 2022, we announced our planned development of the Corsicana Facility, our second large-scale Bitcoin mining and data center hosting facility located on a 265-acre site in Navarro County, Texas. The Corsicana Facility is expected, upon completion, to have one-gigawatt of developed capacity for Bitcoin mining and data center hosting, securely supplied with power by a substation being developed for the Company on the premises that will be interconnected with the nearby Navarro Switch. The strategic decision to locate the Corsicana Facility next to the Navarro Switch was made to limit electricity lost in transmission and maximize the efficiency of our substation’s power distribution facilities. The initial phase of the development of the Corsicana Facility involves the construction of 400 MW of immersion-cooled Bitcoin mining and data center hosting infrastructure spread across multiple buildings, as well as construction of various utilities, offices, warehouses, and infrastructure to support the facility’s operations. Construction of the substation and the data centers is expected to be carried out through 2023, with Bitcoin Mining and Data Center Hosting operations expected to commence following the commissioning of the substation. ​ 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 through the first quarter of 2024. Through June 30, 2023, we had incurred costs of approximately $102.0 million related to the development of the Corsicana Facility, which consisted of $10.1 million for land, $87.2 million of initial developments costs and equipment and a $4.7 million deposit for future power usage. We expect to incur costs of approximately $150 million during the remainder of 2023 and approximately $81 million during the first quarter of 2024. Revenue from Operations Bitcoin Mining We expect to generate ongoing revenues from Bitcoin rewards from our Bitcoin Mining operations and our ability to liquidate Bitcoin rewards at future values will be regularly evaluated to generate cash for operations. Generating Bitcoin rewards which exceed our production and overhead costs will determine our ability to report profit margins related to such Bitcoin mining operations, although accounting for our reported profitability is significantly complex. Furthermore, regardless of our ability to generate proceeds from the sale of our Bitcoin produced from our Bitcoin 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. Data Center Hosting Generally, we provide power for our hosted/co-located Bitcoin mining data center clients on a variable (sub-metered) basis. Each client pays us variable monthly fees based on the amount of power, networking costs, and other basic hosting services utilized by such client’s hosted operations, at rates specified in such client’s hosting agreement. In addition to power charges and basic hosting charges, our hosting agreements with certain clients provide for revenue sharing, based on the clients’ operating revenue, net of direct hosting costs paid to us. We recognize variable hosting revenue each month, as the hosting fees and revenue sharing payments due to us from our hosting clients are subject to various uncertainties largely outside of our control, including the amount of power used by the hosted client, the market price for Bitcoin, the Bitcoin network difficulty and global hash rate, as well as other factors. We generate engineering and construction services revenue from the fabrication and deployment of immersion cooling technology for Bitcoin mining clients, for which we bill the client at a fixed monthly fee or at an hourly rate. For the installation and maintenance 32 Table of Contents of client-owned equipment, revenue is recognized upon completion of each phase of the installation project, as defined in each client’s hosting agreement. For the construction of assets owned by us but paid for and used by the client during the term of their data center hosting contract, revenue is recognized on a straight-line basis over the remaining life of the contract. Maintenance services include cleaning, cabling, and other services to maintain the clients’ equipment. We bill the client at a fixed monthly fee or at an hourly rate. Revenue is recognized as these services are provided. For a number of clients inherited as a result of the Whinstone acquisition, we provide data center hosting services pursuant to hosting agreements containing below-market terms, including as to power costs (“Legacy Contracts”). Accordingly, our hosting revenue from such Legacy Contracts has, historically, been less than our cost to provide such clients with hosting services. We are presently engaged in litigation relating to such Legacy Contracts, further increasing our costs associated with these Legacy Contracts. Our goal, moving forward, is to protect and advance the value of our Data Center Hosting business. In advancement of this goal, we are actively monitoring the performance of such remaining Legacy Contract clients, with a focus on maximizing revenues and enhancing efficiencies both within the segment and through vertical integration across the Company’s business segments. Legacy Hosting Agreements ​ Management continually assesses the performance of the Company’s business segments, to maximize revenues, minimize costs, and enhance efficiencies. As part of their examination of the Company’s Data Center Hosting business segment, management identified several Legacy Contracts inherited through the Whinstone acquisition containing below-market terms. Approximately 200 MW of the total capacity of the Rockdale Facility is occupied by Legacy Contract customers GMO and Rhodium. Management identified, through its assessment of the Company’s business segments, that these Legacy Contract customers have sought to take advantage of the legacy hosting arrangements to the detriment of our Data Center Hosting business. As such, Whinstone believes both GMO and Rhodium are in material breach of their obligations under their respective Legacy Contracts. Whinstone has made reasonable efforts to resolve these Legacy Contract disputes and enter into revised hosting agreements on market terms and is presently engaged in litigation with both GMO and Rhodium. ​ Termination of GMO Legacy Hosting Agreement ​ Following repeated attempts to reach a negotiated resolution of the matter before and after the GMO lawsuit was initiated, Whinstone terminated its Legacy Contract with GMO, effective as of June 29, 2023. Whinstone’s removal of GMO’s legacy miners from the Rockdale Facility, as a result of this termination, will free up approximately 75 MW of mining capacity. In support of the Company’s growth and efficiencies, Whinstone intends to use the 75 MW area formerly occupied by GMO within the Rockdale Facility to host more powerful and efficient miners, either for its Data Center Hosting operations, on terms more accretive to the Company than the terminated legacy agreement, or as part of its Bitcoin Mining operations. ​ Engineering Substantially all engineering revenue is derived from the sale of custom products built to customers’ specifications under fixed-price contracts. Revenues are recognized over time as performance creates or enhances an asset with no alternative use, and for which we have an enforceable right to receive compensation as defined under the contract. The length of time required to complete a custom product varies but is typically between four and 12 weeks. Customers are typically required to make periodic progress payments based on contractually agreed-upon milestones. If we are unable to generate sufficient revenue from our Bitcoin Mining, Data Center Hosting, 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. 33 Table of Contents Operating Activities For the six months ended June 30, 2023, Net cash used in operating activities was $5.8 million, which primarily consisted of the net loss of $83.4 million and net gain on non-cash reconciling items of $4.4 million, partially offset by cash inflows attributable to a net decrease in operating assets and liabilities of $82.0 million. The non-cash net gain primarily consisted of revenue of $97.8 million from our Bitcoin Mining operations and $33.6 million of gains on the sale of Bitcoin, partially offset by depreciation and amortization of $125.5 million, primarily attributable to depreciation of our miners. The net decrease on operating assets and liabilities primarily consisted of proceeds from the sale of Bitcoin of $89.2 million. The proceeds from the sale of Bitcoin and resulting gain on sale of Bitcoin are attributable to our management and consideration of cash requirements for our ongoing operations and expansion. ​ For the six months ended June 30, 2022, Net cash used in operating activities was $14.4 million, which primarily consisted of the net loss of $317.0 million, partially offset by a net loss from non-cash reconciling items of $261.6 million and net decrease in operating assets and liabilities of $41.0 million. The non-cash net loss primarily consisted of goodwill impairment of $335.7 million and impairment of Bitcoin $127.3 million, primarily attributable to decreases prices of Bitcoin throughout the period, partially offset by an increase in the fair value of the derivative asset of $104.6 million, attributable to increased value of our fixed price power agreement as compared to the forward power curve, and Bitcoin Mining revenue of $104.1 million. The net decrease of operating assets and liabilities primarily consisted of proceeds from the sale of Bitcoin of $33.1 million. The proceeds from the sale of Bitcoin and resulting gain on sale of Bitcoin are attributable to our management and consideration of cash requirements for our ongoing operations and expansion. ​ Investing Activities For the six months ended June 30, 2023, Net cash used in investing activities was $107.5 million, which primarily consisted of purchases of property and equipment of $107.4 million, primarily attributable to now complete expansion of the Rockdale Facility, ongoing development of the Corsicana Facility, and continued deployment of miners. ​ For the six months ended June 30, 2022, Net cash used in investing activities was $269.9 million, which primarily consisted of deposits paid on future shipments of miners of $192.5 million and purchases of property and equipment of $77.4 million, primarily attributable to the expansion of the Rockdale Facility and continued deployment of miners. ​ Financing Activities For the six months ended June 30, 2023, Net cash provided by financing activities was $172.1 million, which consisted of net proceeds from the issuance of shares under the ATM program of $184.7 million to be used to fund ongoing growth, partially offset by the repurchase of shares of common stock withheld to satisfy employee withholding taxes of $13.0 million in connection with the settlement of vested equity awards granted under our 2019 Equity Incentive Plan. ​ For the six months ended June 30, 2022, Net cash provided by financing activities was $242.5 million, which consisted of net proceeds from the issuance of shares under the ATM program of $267.0 million used to fund ongoing growth, partially offset by payments on our contingent consideration liability of $15.7 million related to our acquisition of Whinstone and the repurchase of shares of common stock withheld to satisfy employee withholding taxes of $8.8 million in connection with the settlement of vested equity awards granted under our 2019 Equity Incentive Plan. ​ Critical Accounting Policies Our critical accounting policies and significant estimates have not changed from those detailed in our 2022 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 We have evaluated all recently issued accounting pronouncements and believe such pronouncements do not have a material effect on our financial statements. 34 Table of Contents Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements.