Item 2. Management’s Discussion and Analysis
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 Condensed Consolidated Financial Statements and the related notes (the “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.
Unless otherwise indicated, amounts are stated in thousands of U.S. Dollars except for share, per share, and miner amounts, and Bitcoin quantities, prices, and hash rate.
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. 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 activities 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 and 2023, we have 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. Further affecting the margins of the companies within the Bitcoin ecosystem, the Bitcoin reward for solving a block is subject to periodic incremental halving, which is next anticipated to occur in April 2024. The network halving is a preprogrammed, fixed process of the Bitcoin network where the Bitcoin reward for solving a block received by miners is reduced by half approximately every four years. The network halving will continue to occur on this schedule until the amount of Bitcoin in existence reaches the cap of 21 million. The network halving is a process designed to implement a periodic decreasing schedule of the issuance of new Bitcoin into the market which results in a predictable and controlled inflationary rate.
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 potentially unsustainable ways given the recent variability in the price of Bitcoin. Riot chose to refrain from engaging in any significant 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 our 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 our 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
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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 the remainder of 2023 and 2024 will continue to be a period of consolidation in the Bitcoin mining industry. Further, given our relative position, liquidity, and absence of any significant long-term debt, we believe we are well positioned to benefit from such consolidation. 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, and our business and financial results may change significantly as a result of such strategic growth.
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 of the industry. We did not have any exposure to any digital asset lenders or exchanges who have declared bankruptcy or have suspended operations. We only hold and sell Bitcoin that we have mined and do not sell, hold, or redeem any Bitcoin for any other parties. Our Bitcoin is held in cold storage wallets by a well-known U.S. based third-party digital asset-focused custodian. We also sell our Bitcoin using our custodian’s U.S. brokerage 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 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 we suffered no losses with respect to our 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 nine months ended September 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 September 30, 2023, our Bitcoin Mining business segment operated 98,694 miners, with a hash rate capacity of 10.9 EH/s, which excludes 14,250 miners currently offline due to infrastructure damage sustained by our Rockdale Facility during severe winter storms in December 2022. We expect repairs to the Rockdale Facility to be completed and to bring sidelined hash rate capacity back online during the fourth quarter of 2023. During the nine months ended September 30, 2023, we mined 4,996 Bitcoin, which represented an increase of 30.0% over the 3,842 Bitcoin we mined in the nine months ended September 30, 2022. We anticipate achieving a total self-mining hash rate capacity of 12.5 EH/s in the fourth quarter 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 an option to purchase up to an additional 66,560 additional M56S++ miners through December 31, 2024, on the same terms as the initial purchase order. 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.
For the nine months ended September 30, 2023, Bitcoin Mining revenue was approximately $129.0 million.
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Data Center Hosting
Following our acquisition of Whinstone, we commenced an expansion of our Rockdale Facility, to more than double its developed capacity at the time of acquisition and, as of September 30, 2023, this expansion had been 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 PPA.
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 nine months ended September 30, 2023, Data Center Hosting revenue was approximately $21.8 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 Corsicana and Rockdale Facility expansions 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 allow 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 revenue is 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 nine months ended September 30, 2023, Engineering revenue was approximately $51.0 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.
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Summary of Bitcoin Mining Results
The following tables present 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
4,996
128,987
Proceeds from sale of Bitcoin
(4,615)
(118,833)
Exchange of Bitcoin for employee compensation
(28)
(696)
Realized gain on sale of Bitcoin
—
47,098
Impairment of Bitcoin
—
(14,151)
Balance as of September 30, 2023
7,327
$
151,825
Quantity
Amounts
Balance as of January 1, 2022
4,884
$
150,593
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 of Bitcoin
—
28,034
Impairment of Bitcoin
—
(130,310)
Balance as of September 30, 2022
6,766
$
120,558
Results of Operations
Comparative Results for the three months ended September 30, 2023 and 2022:
Revenue
Total revenue for the three months ended September 30, 2023 and 2022, was $51.9 million and $46.3 million, respectively, and consisted of our Bitcoin Mining revenue, Data Center Hosting revenue, Engineering revenue, and other revenue.
For the three months ended September 30, 2023 and 2022, Bitcoin Mining revenue was $31.2 million, and $22.1 million, respectively. The increase of $9.2 million was primarily due to an increase of 64 Bitcoin mined in the 2023 period as compared to the 2022 period as a result of an increase in miners deployed and higher Bitcoin values in the 2023 period, partially offset by an increase in the Bitcoin network difficulty. In the 2023 period, Bitcoin prices averaged $28,230 per coin, as compared to $21,184 for the 2022 period. Additionally, we continued employing our power strategy to significantly reduce overall power costs. As noted below, during the three months ended September 30, 2023 and 2022, we earned $49.6 million and $13.1 million, respectively, in power credits, which were received in cash or credited against our power invoices, as a result of temporarily pausing our operations. The power credits equate to approximately 1,757 Bitcoin and 617 Bitcoin, respectively, as computed using the average daily Bitcoin prices for the applicable period.
For the three months ended September 30, 2023 and 2022, Data Center Hosting revenue was $5.1 million, and $8.4 million, respectively. The decrease of $3.3 million was primarily due to hosting fewer customers during the 2023 period as we continue to address legacy contracts.
For the three months ended September 30, 2023 and 2022, Engineering revenue was $15.5 million and $15.8 million, respectively. The decrease of $0.3 million was primarily attributable to supply chain constraints resulting in decreased receipts of materials, delaying the completion of certain custom products, and therefore, the recognition of revenue. Our custom electrical products such as switchgear and power distribution centers are used as important components in data center development and in power generation and distribution facilities, and there has been increased demand for these products due to the continued increase in data center construction by developers, as well as the continually increasing worldwide demand for power.
Costs and expenses
Cost of revenue for Bitcoin Mining for the three months ended September 30, 2023 and 2022, was $24.4 million and $14.7 million, respectively, an increase of approximately $9.8 million. As a percentage of Bitcoin Mining revenue, Bitcoin Mining cost of revenue
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was 78.3% and 66.5% for the three months ended September 30, 2023 and 2022, respectively. Cost of revenue 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 our expanded Bitcoin mining operations. As noted below, during the three months ended September 30, 2023 and 2022, we earned $49.6 million and $13.1 million, respectively, in power credits to be credited against our power invoices, as a result of temporarily pausing our operations to participate in ERCOT’s Demand Response Service Programs. Our fixed-price power purchase contracts enable us to strategically curtail our mining operations and participate in these programs, which significantly lower our cost to mine Bitcoin. These credits are recognized in Power curtailment credits on our Condensed Consolidated Statements of Operations, outside of cost of revenue, but significantly reduce our overall cost to mine Bitcoin. When netting the power curtailment credits allocated to Bitcoin Mining with the costs of revenue, the net costs as a percentage of Bitcoin Mining revenue were (21.8)% and 38.8% for the three months ended September 30, 2023 and 2022, respectively. For the three months ended September 30, 2023, the net costs as a percentage of Bitcoin Mining revenue were negative due to power curtailment credits exceeding costs of revenue.
Cost of revenue for Data Center Hosting for the three months ended September 30, 2023 and 2022, was $26.1 million and $14.2 million, respectively, an increase of approximately $11.9 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 revenue for Engineering for the three months ended September 30, 2023 and 2022, was $13.2 million and $13.8 million, respectively, a decrease of approximately $0.6 million. The costs consisted primarily of direct materials and labor, as well as indirect manufacturing costs. The decrease was primarily due to decreased receipts of materials resulting from increased competition for direct materials due to supply chain constraints.
Selling, general and administrative expenses for the three months ended September 30, 2023 and 2022, were $29.1 million and $16.0 million, respectively, an increase of approximately $13.1 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 $10.0 million due to our long-term incentive program implemented during the quarter, compensation expenses of $2.0 million as a result of hiring additional employees to support our ongoing growth, and increased legal and professional fees of $2.3 million primarily related to ongoing litigation and public company compliance, partially offset by decreases of $1.3 million in other general operating costs, including information technology projects.
Depreciation and amortization for the three months ended September 30, 2023 and 2022, was $64.6 million and $26.6 million, respectively, an increase of approximately $38.0 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 change in fair value of our derivative asset for the three months ended September 30, 2023 and 2022, was a gain of $3.9 million and a loss of $17.7 million, respectively, and was recorded to adjust the fair value of our PPA, which was classified as a derivative asset and measured at fair value. The changes in fair value were due to changes in future power prices over the applicable period.
Power curtailment credits for the three months ended September 30, 2023 and 2022, were $49.6 million and $13.1 million, respectively, and represent sales of unused power under our PPA and participation in ancillary services under ERCOT Demand Response Services Programs. The amount of these credits varies from period to period depending on various factors impacting the supply of power to, and the demand for power on, the ERCOT grid, such as weather and global fuel costs.
Realized gains on the sale of Bitcoin for the three months ended September 30, 2023 and 2022, were $13.5 million and $3.1 million, respectively. The increase was primarily attributable to an increase of 115 Bitcoin sold in the 2023 period as compared to the 2022 period and increased Bitcoin values in the 2023 period as compared to the 2022 period.
Impairment of Bitcoin for the three months ended September 30, 2023 and 2022, was $4.0 million and $3.0 million, respectively, arising from declines in Bitcoin prices during the respective periods.
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Comparative Results for the nine months ended September 30, 2023 and 2022:
Revenue
Total revenue for the nine months ended September 30, 2023 and 2022 was $201.9 million and $199.0 million, respectively, and consisted of our Bitcoin Mining revenue, Data Center Hosting revenue, Engineering revenue, and other revenue.
For the nine months ended September 30, 2023 and 2022, Bitcoin Mining revenue was $129.0 million, and $126.2 million, respectively. The increase of $2.8 million was primarily due to an increase of 1,154 Bitcoin mined in the 2023 period as compared to the 2022 period as a result of an increase in miners deployed, partially offset by lower Bitcoin values in the 2023 period, averaging $25,818 per coin, as compared to $32,839 for the 2022 period, and an increase in the Bitcoin network difficulty. Additionally, we continued employing our power strategy to significantly reduce overall power costs. As described below, during the nine months ended September 30, 2023, we earned $66.1 million in power credits, which were received in cash or credited against our power invoices, as a result of temporarily pausing operations. The power credits equate to approximately 2,562 Bitcoin, as computed using the average daily Bitcoin prices for the 2023 period. During the nine months ended September 30, 2022, we earned $21.3 million in power credits, or the equivalent of approximately 649 Bitcoin, as computed using the average daily Bitcoin prices for the 2022 period.
For the nine months ended September 30, 2023 and 2022, Data Center Hosting revenue was $21.8 million, and $27.9 million, respectively. The decrease of $6.1 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 as we continue to address legacy contracts.
For the nine months ended September 30, 2023 and 2022, Engineering revenue was $51.0 million and $44.9 million, respectively. The increase of $6.1 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 in power generation and distribution facilities, and there has been increased demand for these products due to the continued increase in data center construction by developers, as well as the continually increasing worldwide demand for power.
Costs and expenses
Cost of revenue for Bitcoin Mining for the nine months ended September 30, 2023 and 2022, was $70.0 million and $51.8 million, respectively, an increase of approximately $18.2 million. As a percentage of Bitcoin Mining revenue, cost of revenue totaled 54.3% and 41.0% for the nine months ended September 30, 2023 and 2022, respectively. Cost of revenue 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 to maintain and support the Bitcoin mining operations. As noted below, during the nine months ended September 30, 2023 and 2022, we earned $66.1 million and $21.3 million, respectively, in power credits to be credited against our power invoices, as a result of temporarily pausing our operations to participate in ERCOT’s demand response and ancillary services programs. Our fixed-price power contracts enable us to strategically curtail our mining operations and participate in these programs, which significantly lower our cost to mine Bitcoin. These credits are recognized in Power curtailment credits on our Condensed Consolidated Statements of Operations, outside of cost of revenue, but significantly reduce our overall cost to mine Bitcoin. When netting the power curtailment credits allocated to Bitcoin Mining with the costs of revenue, the net costs as a percentage of Bitcoin Mining revenue were 21.4% and 34.6% for the nine months ended September 30, 2023 and 2022, respectively.
Cost of revenue for Data Center Hosting for the nine months ended September 30, 2023 and 2022, was $73.9 million and $44.4 million, respectively, an increase of approximately $29.5 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 revenue for Engineering for the nine months ended September 30, 2023 and 2022, was $46.9 million and $40.5 million, respectively, an increase of approximately $6.4 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 electricity transmission products. Increased competition for direct materials due to supply chain constraints contributed to additional costs, as well as inflationary pressure for labor in manufacturing.
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Selling, general and administrative expenses for the nine months ended September 30, 2023 and 2022, were $61.6 million and $37.5 million, respectively, an increase of approximately $24.0 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 $7.7 million as a result of hiring additional employees to support our ongoing growth, increased stock-based compensation of $7.4 million due to the adoption of the long-term incentive plan and additional headcount, increased legal and professional fees of $6.1 million primarily related to ongoing litigation and public company compliance, and increases of $2.8 million in other general operating costs such as information technology projects to support our growth.
Depreciation and amortization expense for the nine months ended September 30, 2023 and 2022, was $190.1 million and $61.4 million, respectively, an increase of approximately $128.7 million. The increase was primarily due to higher depreciation expense recognized for the Rockdale Facility and significant increase in number of recently acquired miners.
The increase in fair value of our derivative asset for the nine months ended September 30, 2023 and 2022, was $11.3 million and $86.9 million, respectively, and was recorded to adjust the fair value of our PPA, which was classified as a derivative asset and measured at fair value. The increases in fair value were due to increases in future power prices over the applicable period.
Power curtailment credits for the nine months ended September 30, 2023 and 2022, were $66.1 million and $21.3 million, respectively, which represent sales of unused power under our PPA and participation in ancillary services under ERCOT Demand Response Services 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 and global fuel costs.
The realized gain on sale of Bitcoin for the nine months ended September 30, 2023 and 2022 was $47.1 million and $28.0 million, respectively. The increase was primarily attributable to 2,690 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.
Impairment of Bitcoin for the nine months ended September 30, 2023 and 2022, was $14.2 million and $130.3 million, respectively, arising from declines in Bitcoin prices during the respective periods, with more significant declines occurring in the 2022 period.
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 our 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.
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The following table reconciles Adjusted EBITDA to Net income (loss) , the most comparable GAAP financial measure:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2023
2022
2023
2022
Net income (loss)
$
(45,325)
$
(32,435)
$
(128,700)
$
(349,416)
Interest (income) expense
(2,318)
(348)
(3,331)
9
Income tax expense (benefit)
(157)
(2,952)
(5,014)
(8,839)
Depreciation and amortization
64,569
26,559
190,071
61,366
EBITDA
16,769
(9,176)
53,026
(296,880)
Adjustments:
Stock-based compensation expense
13,519
3,561
14,652
7,304
Acquisition-related costs
—
—
—
78
Change in fair value of derivative asset
(3,943)
17,749
(11,274)
(86,865)
Change in fair value of contingent consideration
—
—
—
176
Realized loss on sale of marketable equity securities
—
—
—
1,624
Unrealized (gain) loss on marketable equity securities
—
(142)
—
6,306
Loss (gain) on sale/exchange of equipment
5,306
(7,667)
5,336
(16,281)
Casualty-related charges
—
—
1,526
—
Impairment of goodwill
—
—
—
335,648
Other (income) expense
(31)
—
(96)
59
License fees
(25)
(25)
(73)
(73)
Adjusted EBITDA
$
31,595
$
4,300
$
63,097
$
(48,904)
In addition to Adjusted EBITDA, we believe “Bitcoin Mining revenue in excess of cost of revenue, net of power curtailment credits”, “Data Center Hosting revenue in excess of cost of revenue, net of power curtailment credits”, “Cost of revenue – Bitcoin Mining, net of power curtailment credits” and “Cost of revenue – Data Center Hosting, net of power curtailment credits” are additional non-GAAP performance measurements that represent a key indicator of our 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 revenue, net of power curtailment credits, Data Center Hosting revenue in excess of cost of revenue, net of power curtailment credits, Cost of revenue – Bitcoin Mining, net of power curtailment credits and Cost of revenue – 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 revenue – Bitcoin Mining or Cost of revenue – Data Center Hosting as presented in our Condensed Consolidated Statements of Operations.
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The following table presents reconciliations of these measurements to the most comparable GAAP financial measures:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2023
2022
2023
2022
Bitcoin Mining
Revenue
$
31,222
$
22,070
$
128,987
$
126,166
Cost of revenue
24,449
14,677
69,995
51,766
Power curtailment credits allocated to Bitcoin Mining
(31,249)
(6,104)
(42,333)
(8,175)
Cost of revenue, net of power curtailment credits
(6,800)
8,573
27,662
43,591
Bitcoin mining revenue in excess of cost of revenue, net of power curtailment credits
$
38,022
$
13,497
$
101,325
$
82,575
Bitcoin mining revenue in excess of cost of revenue, net of power curtailment credits as a percentage of revenue
121.8%
61.2%
78.6%
65.4%
Data Center Hosting
Revenue
$
5,108
$
8,371
$
21,811
$
27,899
Cost of revenue
26,135
$
14,223
$
73,929
$
44,392
Power curtailment credits allocated to Data Center Hosting
(18,352)
(6,996)
(23,813)
(13,153)
Cost of revenue, net of power curtailment credits
7,783
7,227
50,116
31,239
Data Center Hosting revenue in excess of cost of revenue, net of power curtailment credits
$
(2,675)
$
1,144
$
(28,305)
$
(3,340)
Data Center Hosting revenue in excess of cost of revenue, net of power curtailment credits as a percentage of revenue
(52.4)%
13.7%
(129.8)%
(12.0)%
Total consolidated power curtailment credits
$
(49,601)
$
(13,070)
$
(66,146)
$
(21,328)
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2023, we had working capital of approximately $442.3 million, which included cash and cash equivalents of $290.1 million. We reported a net loss of $128.7 million during the nine months ended September 30, 2023, which included $35.1 million in non-cash expenses, primarily consisting of depreciation and amortization of $190.1 million, partially offset by Bitcoin Mining revenue of $129.0 million and gains on the sale of Bitcoin of $47.1 million.
During the nine months ended September 30, 2023, we sold 4,615 Bitcoin for proceeds of approximately $118.8 million. We monitor our balance sheet on an ongoing basis and evaluate the level of Bitcoin retained in consideration of our cash requirements and ongoing operations. Our Bitcoin sales for the 2023 period were for substantially all of our Bitcoin production, but never more than our production on a monthly basis per our internal policy.
Through our ATM offerings, during the nine months ended September 30, 2023, we issued 27,492,345 shares of common stock, at a weighted average price of $11.81 per share, for net proceeds of approximately $317.2 million. Subsequent to September 30, 2023, and through November 6, 2023, we received net proceeds of approximately $101.1 million from the sale of 10,196,000 shares of our common stock at a weighted average price of $10.12 per share under our 2023 ATM Offering.
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, we had outstanding executed purchase agreements for the purchase of miners from Bitmain for a total of 5,130 S19 series miners, all of 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
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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 us 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 the first quarter of 2024, 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 our immersion-cooling infrastructure and technology. We estimate 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 September 30, 2023, we had incurred costs of approximately $155.2 million related to the development of the Corsicana Facility, which consisted of $10.1 million for land, $140.4 million of initial developments costs and equipment and a $4.7 million deposit for future power usage. We expect to incur costs of approximately $128 million during the remainder of 2023 and approximately $50 million during the first quarter of 2024.
Revenue from Operations
Bitcoin Mining
We expect to generate ongoing revenue 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 of client-owned equipment, revenue is recognized upon completion of each phase of the installation project, as defined in each
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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 is to protect and advance, to the extent it is within our control, 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 revenue and enhancing efficiencies both within the segment and through vertical integration across our business segments.
Legacy Hosting Agreements
Management continually assesses the performance of our business segments, to maximize revenue, minimize costs, and enhance efficiencies. As part of their examination of our 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 our 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, because of this termination, will free up approximately 75 MW of mining capacity. In support of our 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 our Bitcoin Mining operations.
Engineering
Substantially all engineering revenue is derived from the sale of custom products built to customers’ specifications under fixed-price contracts. Revenue is 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.
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Operating Activities
For the nine months ended September 30, 2023, net cash used in operating activities was $12.0 million, which primarily consisted of the net loss of $128.7 million, partially offset by net cash inflows of $81.6 million due to changes in operating assets and liabilities, including proceeds from the sale of Bitcoin, and a net loss on non-cash reconciling items of $35.1 million. The net cash inflow due to changes in operating assets and liabilities primarily consisted of net cash inflows of $118.8 from the sale of Bitcoin, partially offset by net cash outflows of $37.2 million attributable to changes in non-Bitcoin operating assets and liabilities. The non-cash net loss primarily consisted of depreciation and amortization of $190.0 million, primarily attributable to depreciation of our miners, partially offset by revenue of $129.0 million from our Bitcoin Mining operations and $47.1 million of gains on the sale of Bitcoin.
For the nine months ended September 30, 2022, net cash used in operating activities was $1.0 million, which primarily consisted of the net loss of $349.4 million, partially offset by a net loss on non-cash reconciling items of $278.5 million and net cash inflows attributable to changes in operating assets and liabilities, including proceeds from the sale of Bitcoin, and of $70.0 million. The non-cash net loss primarily consisted of goodwill impairment of $335.6 million and impairment of Bitcoin of $130.3 million, partially offset by Bitcoin Mining revenue of $126.2 million and an increase in the fair value of the derivative asset of $86.9 million, attributable to the increased value of our fixed price power agreement as compared to the forward power curve. The net cash inflows from operating assets and liabilities primarily consisted of proceeds from the sale of Bitcoin of $52.5 million, partially offset by changes in non-Bitcoin operating assets and liabilities.
Investing Activities
For the nine months ended September 30, 2023, net cash used in investing activities was $232.4 million, which primarily consisted of purchases of property and equipment of $148.2 million attributable to the now complete expansion of the Rockdale Facility, ongoing development of the Corsicana Facility, continued deployment of miners, and payments for deposits on equipment of $90.5 million.
For the nine months ended September 30, 2022, net cash used in investing activities was $329.4 million, which primarily consisted of deposits paid on future shipments of miners of $194.9 million and purchases of property and equipment of $129.7 million, primarily attributable to the expansion of the Rockdale Facility and continued deployment of miners.
Financing Activities
For the nine months ended September 30, 2023, net cash provided by financing activities was $304.1 million, which consisted of net proceeds from the issuance of shares under the ATM program of $317.2 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 $13.9 million in connection with the settlement of vested equity awards granted under our 2019 Equity Incentive Plan.
For the nine months ended September 30, 2022, net cash provided by financing activities was $272.8 million, which consisted of net proceeds from the issuance of shares under the ATM program of $298.4 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 $9.9 million in connection with the settlement of vested equity awards granted under our 2019 Equity Incentive Plan.
Critical Accounting Policies and Estimates and New Accounting Pronouncements
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 Accounting Pronouncements” in Note 3, Basis of Presentation, Summary of Significant Accounting Policies and Recent Accounting Pronouncements in the Notes.
We have evaluated all recently issued accounting pronouncements and do not believe any such pronouncements currently have, and do not expect such pronouncements to have, a material impact on our Condensed Consolidated Financial Statements on a prospective basis.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.